The white shiny metal, Silver has been shining brighter than ever in the last few months; both globally and domestically. After years of consolidation, the prices of silver have shot up catching investor’s attention worldwide.
Since July, Silver Futures on MCX have surged nearly 40%, while Silver ETFs have jumped more than 60%. That it a massive move for a commodity that has majorly remained in the shadows of the gold. In fact, the recent surge has helped Silver gain more popularity than Gold too. We compared Silver investments – Silver Futures in MCX, Silver ETF, and Silver (International Prices) against Gold to understand how this metal has panned out in the past year.
Source: Tradingview, EduFund Internal Research. We have taken Nippon India Silver ETF (SilverBeeS) as Silver ETF proxy.
Notice how Gold had been in the spotlight in Mar-Jun, post which Silver outshined its partner and is currently delivering higher returns on YoY basis.
EduFund had also initiated a coverage on Silver back in July, highlighting its growing relevance as a hedge and diversification tool along with Gold. But now with everyone talking about Silver, the question arises – Is it still a good time to invest in Silver?
The Silver Rush: What’s Happening?
The recent rally in Silver prices can be attributed majorly to a mix of global and domestic factors. Globally, renewed industrial demand from solar panel and EV manufacturing firms, a weaker dollar, and central bank purchases have been supporting the rising prices of silver. Domestically, the investor participation in Silver has seen a surge which has led to increase in demand. While the supply is limited, the increased demand has led to prices seeing a surge especially in Silver ETFs and Silver FoFs.
Before we go further to introspect whether it is a good time to invest in silver or not, a quick refresher on ETFs and FoFs would be better.
How Silver ETFs and Silver Mutual Funds (FoF) work
Silver ETFs are exchange traded funds that invest directly in physical silver and aim to mirror the domestic silver price. The units are traded on the exchange, just like shares. So as more and more investors buy Silver ETFs, these funds will purchase physical silver to manage the ETF performance.
Silver FoFs, on the other hand allow investors to invest in ETFs without the need of a demat account. These FoFs in turn, invest in Silver ETFs, meaning when an investor invests in FoFs, more ETFs would be purchased.
The Catch: ETFs Trading at a Premium
As you understood, as the demand for Silver ETFs increase (through direct demand or through FoFs), these funds need to invest in Physical Silver to closely track the silver prices in India. As the buzz around silver has increased, Silver ETFs has seen a rise in investments. As a result, demand for physical silver too has increased largely. As the supply has been limited, procurement for silver has been difficult even for Fund Managers.
Because of all these reasons, many silver ETFs are trading at a 5-10% premium over their Net Asset Value (NAV). What does this mean? Let’s say if a unit of an ETF represents ₹80 worth of silver, it is available at a price of ₹88 in the markets. So, investors buying ETF for ₹88 in the market is only getting ₹80 worth of silver in return. A classic case of FOMO driving prices higher than the intrinsic value.
Kotak AMC’s Bold Move
Kotak AMC yesterday announced that it is temporarily suspending lump sum investments and switch ins in its Silver ETF Fund of Fund as its ETF is trading at a premium over its NAV. SIPs and STPs on the other hand will continue as is. The reason behind Kotak’s suspension is to protect investor’s interest as investments at a premium will be inefficient for investors.
While the investors continue to invest due to FOMO, this move from Kotak is a clear sign of the inflated premiums in Silver ETFs and other AMCs too are soon expected to follow similar steps. So, time for our question.
Should you Invest in Silver now?
Here’s the short answer:
- New Investors should wait for premiums to settle down without rushing to invest in Silver because of the fear of missing the rally in Silver.
- Existing Investors should not worry and redeem impulsively out of the fear. While the premiums are high, it is not clear when the prices might stabilise so better to hold and wait for opportunities before adding more.
The long term outlook for Silver still remains bullish due to various factors like strong industrial demand, supply constraints, Gold to Silver ratio trading higher than its historical average.
Bonus: How to Track Fair Value of your ETF
As we are talking about the silver ETFs trading at premium, you should always consider this factor before you invest in any ETF. Make sure you keep an eye on the iNAV (indicative Net Asset Value) of the ETF which measures the underlying value of fund assets per unit.
If the market price of the ETF is trading significantly over its iNAV, it means you are paying a premium. And ideally, you want to buy when the ETF trades close to its iNAV, ensuring you get a fair value of your invested money.
Final Thoughts
Silver might be the talk of the town right now. Every news headline, or investment forums will be discussing Silver and its potential as an asset. But jumping in it just because it is the buzz currently or it has rallied is not a good idea.
Investing should be driven by rational analysis, not impulse or FOMO. Let the prices normalise and let the premiums settle, and then consider building an exposure that are suitable to your investment goals.
The metal may continue to shine in the long term, but for your portfolio to shine along with it, it is necessary that you invest in it at the right time.
Disclaimer: The data in this presentation are meant for general reading purpose only and are not meant to serve as a professional guide/investment advice for the readers. This presentation has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been suggested or offered based upon the information provided herein, due care has been taken to endeavor that the facts are accurate and reasonable as on date. The information placed on the presentation is for informational purposes only and does not constitute as an offer to sell or buy a security. The Company reserves the right to make modifications and alterations to the content available on the presentation. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investment. The EduFund platform & the website is owned, operated and maintained by Helena Edtech Private Limited, a company incorporated under the laws of India. An affiliate of the Company, i.e. Edubillions Tech Private Limited is registered with AMFI as mutual fund distributor bearing the registration number ARN258733. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The valuation of securities may increase or decrease depending on the factors affecting the securities market.
About the author
Niraj Satnalika
Head Of Research,EduFund
Dr. Niraj is a finance professional with 12+ years of experience and is part of the founding team at EduFund. He’s worked with Goldman Sachs, CRISIL and Sakal Media in roles spanning investment management, research and leadership. With a PhD in Finance from IIT Bombay, he brings deep expertise in valuation, governance and education planning. When he’s not teaching or writing, you’ll find him cooking or going on long drives.
