Silver lining your portfolio:: Business Line

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If you are wary of gold as an investment option, why not consider silver?Silver has many things going for it — a global recovery, growing industrial use and more loyal investors.

Gold has glamour, but with expectations of economic gloom receding, it is rapidly losing sheen as an investment option. Industrial metals such as copper are a sure-shot bet as the global economy recovers, but lack oomph. But why not consider silver, which combines the best of both worlds? Global silver prices have corrected 32 per cent from their highs. Here are five reasons why silver may offer good returns in the year ahead.

Industrial demand

Unlike gold, which is bought mainly for ornamentation or speculation, silver finds use across many industries. Globally, the white metal derives 45 per cent of its demand from applications in electronics and automotive industries in the form of electrical contacts, fuses, batteries and membrane switches. So, if the global economy gets back to a stronger footing this year, demand for silver could get a leg up.

Though industrial demand for silver dropped in 2011 and 2012 on the back of global economic woes, recently there have been signs of an upturn. The Semiconductor Industry Association reported that in the September quarter of 2013 it registered record sales growth, pointing to better offtake of silver.

China’s push towards solar power also spells greater demand for silver from photovoltaic cell makers. Initial estimates put silver’s industrial demand growth at 2 per cent for 2013. Growth will be even higher in 2014 given that many sectors that skimped on silver usage, as prices hit a high of $49.8/ounce in 2011, may take advantage of the steep correction.

Investors stay put

While metals such as copper or zinc may do an equally good job of riding the ‘global-revival-is-on’ theme, silver also doubles up as the poor man’s gold and thus is bought by investors too. Investment demand for silver, which used to make up only 4 per cent of the global purchase of the metal in 2003, accounts for 24 per cent now. Holdings of the precious metal by silver exchange-traded funds have doubled in the last five years to 620 million ounces. And investors in silver haven’t been as quick to desert it during better times, as those in gold. In 2013, even as gold ETFs had to cut back on their hoard of the yellow metal by a third as investors sold units, holdings of silver ETFs actually increased by 2 per cent. If investors have held on to silver even as prices plummeted, it is unlikely that they will shun the metal now when things are turning favourable.

Jewels and coins

Silver coin sales, another indication of investor appetite, have also been robust. The US Mint announced that sales of the American Eagle one ounce silver bullion coin hit a record 42 million ounces in November 2013, breaking the earlier record of 39.8 million ounces in 2011. The Royal Canadian Mint and the Perth Mint, Australia, too recorded significantly higher sales last year. Analysts point to an increasing preference by the middle class for silver, to diversify their assets, for the demand.

Demand for silver jewellery is also likely to be higher this year. Moves by Indian policymakers to crack down on gold purchases have actually prompted buyers to import more silver. India’s silver imports between January and October 2013 totalled 4,652 tonnes, twice the silver imports for the whole of the previous year. Now, if more people are looking to silver as an alternative to gold, even after relaxing gold import curbs, demand for silver could continue. In West Asia too, analysts point to silver jewellery having gained market share. For consumers, the white metal is relatively cheaper and for fabricators it gives relatively higher margins.

Supplies dwindling

The silver market has been experiencing oversupply since 2006, but, the surplus looks set to reduce in the coming years.

Based on expectations of mine production growth in lead, zinc, copper and gold where silver is a by-product, plus output from primary silver mines, JP Morgan expects mine supply of silver to be at 843 million ounces (23,900 tonnes) in 2014. This is a 4 per cent growth over last year. However, if prices of base metals drop or remain weak in 2014, mine expansions may not happen as expected. This would bring down the supply of silver. Primary silver mines account for just 28 per cent of mined silver, with the rest coming as by-product from mining of other metals.

Supply from scrap that accounts for a little over 20 per cent of total supply may be significantly lower this year as silver prices are sharply down. Reports point out that in the US, the UK and other European countries where ‘cash-for-scrap’ schemes have been popular for a number of years, the stock of old silver scrap has largely been depleted. Scrap supply tends to peak with silver prices. It hit a record high in 2011 at 258 million ounces, dropped to 253.9 million ounces in 2012 and is expected to have fallen to 233.7 million ounces in 2013.

Central bankers too have been wary of selling silver of late. Official sector sales that contributed around 5-6 per cent of supply in silver between 2003 and 2010 have fallen sharply in the last few years.

Numbers from Silver Institute show that sale of Government-held silver dropped 73 per cent to 12 million ounces in 2011 and further down to 7.4 million ounces in 2012.

In 2013, net Government sales were at about 5.6 million ounces. Just as the central banks of Russia, France, Turkey and a few others are hoarding gold, a few are buying silver too. Russia, which chipped in the most to official sales of silver in the last few years, is holding off now.

So, the surplus in the silver market may only shrink, going ahead, as demand growth outstrips growth in supply. New developments in existing sectors and the white metal’s new-found uses in anti-bacterial applications and nano-technology will help bring in an accelerated demand growth.