Silver ETFs offer good investment opportunity amidst market volatility

As investors look for diversification and a hedge against economic uncertainty, there has been a noticeable increase in investment in commodities such as Gold and Silver which have always been considered safe-haven assets. Commodities are frequently seen as a hedge against inflation, given their prices are closely tied to general price levels in the economy. They also offer investors a chance to diversify their portfolios, due to their relatively low correlation with equity markets. This trend was evident during the early stages of the COVID-19 pandemic when equity markets declined, yet inflows into prices of precious metals and related instruments surged as investors sought a safe haven. However, of late Silver, frequently overshadowed by its more glamorous counterpart gold, has garnered significant attention for its dual role as both a precious and industrial metal.

What Makes Silver Attractive?

Silver is a popular choice for precious metal investments worldwide. In September 2024, the US Federal Reserve (Fed) cut the benchmark rate by 50 basis points (bps) amid concerns regarding the job market in the US, and ahead of the US presidential elections. More rate cuts are likely to follow in coming months. This scenario boosts Silver’s attractiveness, as lower interest rates decrease its opportunity cost. Moreover, geopolitical tensions could also prompt risk-averse investors to turn to safer assets such as Silver.A significant portion of Silver demand is driven by industrial applications due to its unique properties, including high conductivity, malleability and resistance to corrosion. The rise of environmentally-friendly manufacturing has increased industrial demand for Silver, particularly in electronics and green technologies. The demand for Silver in industrial applications is expected to grow, driven by the increasing emphasis on sustainable practices. This growing demand, coupled with supply constraints (due to challenges in mining and refining), is expected to push Silver prices higher.

Why Choose Silver ETFs?

Investing in Silver is frequently viewed as a tactical allocation, unlike gold, which is regarded as a strategic investment. Silver’s bulkiness can make physical storage challenging. Previously, Indian investors invested in Silver in the form of bars, coins or jewellery and some engaged in Silver futures trading. However, buying physical Silver incurs GST costs, which can be a disadvantage for unregistered dealers who have to pay out of pocket. With the introduction of Silver Exchange Traded Funds (ETF) regulations, investing in Silver has become more liquid to traditional methods. Additionally, price efficiency is generally better with ETFs compared to traditional physical options. The ETF aims to track the price of Silver and provide returns that closely correspond to the performance of the underlying asset. Being listed on the exchange, Silver ETF offers liquidity, allowing investors to buy and sell units easily.

By choosing Silver ETFs, investors can avoid issues related to purity, theft, storage and liquidity. This innovative and efficient investing approach has made Silver investing more accessible and transparent for retail investors, allowing them to benefit from professional fund management. Investors with a demat account can access Silver ETFs, while those without can invest through a Fund of Fund (FoF). The recent tax changes in Budget 2024 have reduced the taxation on Silver ETFs from marginal tax rates to 12.5% for Long Term Capital Gains, aligning it with the treatment of equities. Additionally, the holding period required for gains to be classified as Long Term has been set at 12 months. This makes Silver ETFs an attractive option for investing in Silver, diversifying your portfolio and providing a buffer to an equity-debt portfolio.

Conclusion

Silver has emerged as a compelling addition to investment portfolios. Factors such as the potential for lower US interest rates, ongoing geopolitical tensions and Silver’s dual role as both an industrial and precious metal enhance its appeal. Silver ETFs provide a convenient and tax-efficient investment option. As part of a balanced asset allocation strategy, investors should consider allocating at least 5-10% of their portfolios to Silver ETFs to take advantage of this promising opportunity.

(Chintan Haria is Principal-Investment Strategy, ICICI Prudential AMC)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)