Time to explore silver as an investment asset

We're in the middle of a transformation across multiple sectors - be it in mobility, energy generation, space exploration, danced electronics, technology, etc. There's been a greater push and importance in countering climate change through initiatives in eco-friendly technologies. Each of these developments require multiple resources to ensure the growth. One common ingredient is silver. Globally electric vehicles (EV) rose over 43 per cent year-on-year in 2020 from previous year.

One estimate involves about 100 per cent increase in silver consumption over internal combustion engine (ICE) vehicles. It puts about 18-34 grams of silver per light ICE vehicle while EV consumes around 25-50 grams. That's almost a two-fold increase in these vehicles and this doesn't include the heavy vehicles like trucks, buses and other vehicles being produced or would be revolutionized sooner. The global demand for silver in automobile industry is forecasted to grow at 22 per cent annually from now till 2025.

Since Paris agreement, COP 21, in 2015 many countries around the world including India have ramped up their green component of their energy generation drastically. India is all set to achieve the target of 40 per cent of electric power installed capacity from non-fossil fuel sources by 2030. The current pace at which the renewable energy capacity is being installed makes India to achieve the target in advance. Also, India has committed for net-zero emissions by 2070 and as per the estimates, the current trajectory would increase the share of renewable power at about 54.5 per cent from the 22.7 per cent in 2019.

As for solar energy website, the total capacity increase is about 18-fold in the last 7 years from 2.6GW to more than 46GW of generation. Solar power generation accounts for about 40 per cent of the overall renewables and is rapidly expanding. Silver being the metal with highest thermal conductivity and the being most reflective metal is an important ingredient in solar panels. Domestic demand would soar with performance linked incentive (PLI) schemes launched to attract photovoltaic cell manufacturing in India. Also, the uses of this metal are extended to water and air purifiers another fast-growing segment across the world.

The pandemic has changed the way we work with many restrictions to operate from workplaces, many of the office bound work has shifted to homes. This has resulted in an increased digitization and amplified the usage of mobile phones, laptops and other electronic gadgets which consume a lot of silver. The additional leisure time spent time at home has resulted in the spike of expansion of gaming during the last two years. And the amplified mining for crypto currencies/trade has boosted the requirement of electronic items like processors, computer peripherals which has silver as an important component.

The new cold war is brewing in space with countries intensifying their programs augmented amply by the private companies. Many countries including India have opened for private enterprise in space which has not only attracted investments but also brought innovation like reusable rockets. This increased competition has got the costs down as well involving private space travel and other explorations. Most of the space tech uses silver and has seen an improved consumption from this sector in the last few years which is bound to increase further. Also is the use of low-Earth satellites for better communication connectivity has silver being extensively used for plating of instruments to protect from radiation.

Majority of silver is consumed and very little is available for recycling. All the mentioned data makes for a bullish fundamental case for silver as an industrial commodity but as an investor how could one take advantage of this evolving situation. During inflationary periods, past experiences point that the higher demand tends to outstrip the supply. Moreover, the gold-silver ratio, the quantity of silver in ounces needed to buy a single ounce of gold is about 80. The current valuation is indicating economic expansion, while higher ratios are often associated with economic recessions due to the weaker industrial demand.

On the technicals, silver has delivered about 74 per cent returns (absolute) in the last 3 years, delivering 13.1 per cent in 1 year and 9.5 per cent in 3 years annually. The compounded returns are at 7.9 per cent and 6 per cent for 5-year and 10-year respectively. It has provided reasonably consistent returns through various phases of economy.

However, it provides a natural hedge in bear phases and has bettered NIFTY 50 TRI during key global events like the subprime crisis during '08-'09, taper tantrum of 2013 and during the steep correction of Covid pandemic. The risk-reward ratio stands at 0.49 with an average return of 12.9 per cent. Though, gold-based Exchange Traded Funds (ETF) or Mutual Funds (MF) have been available for over a decade, there has been a dearth of options for Indian investors on silver.

The recent offerings from ICICI Prudential and Aditya Birla MF allows one to take exposure to this precious metal either through ETF (demat route) and/or Fund-of-Fund (FoF) of MF (demat/physical). These options allow one to not to be bothered about the purity or quality of the metal and could provide a good diversification to the portfolio. Also, holding the financial form of this metal provides the investor higher liquidity and is without any storage costs. An allocation of up to 5 per cent could give a desired risk mitigation to the portfolio.

(The author is a co-founder of 'Wealocity', a wealth management firm and could be reached at [email protected])