Silver seen heading for Rs 1-1.25 lakh per kg, should you invest?

In a sudden jump silver prices recently crossed their previous all-time highs and touched Rs 86,000 per kg (check live prices here)  and there is a lot of chatter that it is heading for Rs 1-1.25 lakh very soon.

The silver bulls have a reason for the optimism. After making lows of $13-14 per ounce in 2022, the metal had been facing resistance around $25-27. But it recently breached $30, and if certain long-term technical indicators of silver enthusiasts are to be believed it may soon accelerate dramatically on its way to new all-time highs.

Before we go any further, let’s see how silver prices move.

Dynamics of silver versus gold prices

Gold for long has proven to be a good hedge against inflation. It also has a low correlation to equity markets. The gold prices are dependent more on the supply-demand balance and geopolitical factors impacting that equation. And because of that gold prices tend to stay dormant for extended periods followed by a sudden and volatile spurt.

But unlike gold, silver isn’t just a precious metal. It’s also a base metal with industrial use. Silver prices tend to be more volatile than gold. In times of economic and geopolitical uncertainties, silver (along with gold) acts as a hedge and behaves like a haven that precious metals are expected to. But at other times, it is more like a base metal with industrial demand. To some extent, this means that investments in silver are linked to global economic growth.

While both are precious metals, the demand-supply forces and the economic sensitivities of both metals are quite different.

While prices of gold and silver have a high correlation, their dynamics are different. Almost always, gold triggers the initial direction of the bullion space followed by silver but with wilder moves on either side. Silver can be at times 2-3 times more volatile than gold in the short term.

Will silver prices rise further?

This time also (in the last few years), silver has exhibited a tendency to lag gold initially. But there are a few factors that now seem to be favouring silver. Increase in geopolitical tensions and minor-though-unignorable role of silver as a safe-haven asset basket. Add to it that there are clear tailwinds supporting demand for silver from the industrial sector (electronics, solar and healthcare).

Silver also looks attractive when one looks at the long-term movement of the gold-silver ratio, which is the price of an ounce of gold divided by the price of an ounce of silver. The ratio is often used by some commodity investors/traders to decide whether to buy more gold or more silver at any given time.

A higher ratio means silver is undervalued compared to gold. Conversely, a lower ratio means silver is overvalued compared to gold.

As on April 13, 2024, the ratio stood at $2350 (gold) divided by $28 (silver), which equals a gold-silver ratio of 83-84.

If you look at the historical charts, it’s clear that the ratio has crossed 80 just a few times over the last few decades.

So that means that at least the ratio is telling that silver is currently highly undervalued compared to gold on a historical basis. Whether it indicates that silver will go on a bull run to close that gap and reduce the ratio is something left to interpretation.

Should you invest in silver?

Precious metals are a sort of hedge as they have a low correlation to other assets. In times of turmoil, precious metals tend to hold their value quite well. That is the reason why in a prudent multi-asset long-term portfolio, it is highly recommended to have some allocation to gold. Silver too has similar characteristics to gold. But precious metals, in my humble view, should always be treated as portfolio diversifiers and not the core components (like equity and debt).

So allocating about 5-15 percent to precious metals (in consultation with your investment advisor and in line with your risk appetite) can be considered and is advisable.

Between gold and silver, for most people, gold in itself is enough for precious metal allocation. And if one wants to have both I suggest giving disproportionately high weight to gold - say you want a 10 percent allocation, then 6-7 percent to gold and 3-4 percent to silver is suggested.
The reason for the skew towards gold is not to say that silver will not move up. Rather while the prices of both metals move in similar directions, gold is better insulated during economic slowdowns and silver isn’t (due to its uses in industries). Gold has often shown a sharper negative correlation with economic growth while silver has a positive but moderately weak correlation to the same.

But if you are a silver bull and a strong believer that good days for silver are not so far ahead, then having higher exposure to silver can be considered via Silver ETFs, or physical silver if you know how to handle them properly.

Disclaimer: This article should not be considered as an investment advice. Everybody’s requirements are unique. So please talk to your investment advisor to know whether and how much should you be investing in precious metals.