Silver as a commodity
Silver, as a precious metal is a tradeable commodity on commodity exchanges in almost all the countries in the world. It was used as a currency for almost 4000 years till the end of silver standard. Known as the poor man’s gold, silver is a popular raw material for jewellery. However, most of its intrinsic value arises from massive usage in industry. More than half the demand for silver comes from industries like alloys, glass coatings,batteries, water purification, dentistry, photography,LED chips, touch screens, semiconductors, medicine, nuclear reactors, RFID chips (for tracking parcels or shipments worldwide), photovoltaic (or solar) energy, wood preservatives, and many other industrial uses.Since the 1990s, the demand for silver has outpaced production rates, resulting in steady increase of prices, making it an attractive investment option for many traders.
Around 85% of the supply of silver comes from mining,14% comes from scrap silver and the rest from investment stock like silver bars and coins. The largest silver producing countries include Mexico, Peru and China followed by Russia, Chile, Australia, Bolivia, Poland, USA and Argentina. Demand for silver is mainly generated from India and United States at the top of the list, followed by UK, Canada, Germany, Japan and China. It is interesting to note that silver is mainly imported by the wealthier countries on the map, except India, which is still a developing nation. This is majorly driven by demand for investible silver. While the other countries have highly organized markets and various avenues for silver investments, including ETFs, Futures and Commodity trading, the market for silver trading in India is still nascent and not easily accessible for retail investors. This provides a huge opportunity for developing an organised and easily accessible market for investing in silver.
Factors influencing the price of silver
- Demand and Supply gaps: Just like precious metals, supply of silver is fixed in nature. It cannot be printed out by Central banks. Mining companies extract silver from the ground. Thus the price of silver is mainly influenced by supply against demand.Mining of silver is an expensive affair, which acts as a negative factor to boost supply. At the same time, the demand for silver, half of it coming from the industry remains more or less stable. Factors in demand and supply that generally affect prices include discovery of new deposits, mining activity and strikes, traders’ outlook towards silver, etc. Investors need to keep in mind all these trends while making an informed decision about investing in silver.
- Change in Industrial demand: Many industries consuming silver in the recent past have seen either a global decline or a replacement of the metal by other raw materials which are cheaper and more effective. These include photography, manufacture of flatware, production of mirrors, etc. On the other hand, some fast-growing industries have seen a spike in the demand of silver due to its unique properties. These include electronics, solar cells, LED, etc. Any new demand created by an upcoming industry with growth prospects can go a long way in increasing the price of silver.
- Inflation and currency: Historically, it has been observed that investors have retreated to precious metals like gold and silver in the scenario of growing inflation and the declining value of currency. Thus, price of silver is greatly influenced by the prospects of inflation in the future.
- Price of Gold: There has been a strong positive relationship between the prices of gold and silver in the past. Traders usually track the gold-to-silver ratio to spot bearish or bullish trends on both metals.
- Stock market performance: It has been observed globally that with a fall in the stock markets, there is a rise in the prices of precious metals like silver and gold. Thus, silver is a safe haven investment as it acts as a hedge for investors against falling markets.
Trading in silver
The price of silver is highly volatile due to its varied sources of demand, right from industrial use, to speculation demand, to its use as a safe haven investment.Silver is traded in large volumes on the biggest commodity exchanges in the world. These include MCX, COME, London Metal Exchange, NYSE Euronext, Tokyo Commodity Exchange, etc. MCX was ranked as No.1 in silver trading in 2011. Total volumes of silver traded on these exchanges globally amounts to 160bn ounces, compared to roughly 900 million ounces of global mining supply*.This means that silver is leveraged close to 180 times on the global exchanges. This is more than double of the trading leverage of gold.
However, in India, commodity trading in silver is still at the developing stage, with people resorting to stocking of physical silver in absence of other methods of investment.However, it is traded widely on National Multi-Commodity Exchange of India through futures and options contracts. It is interesting to note that India is one of the biggest traders in silver futures after the US market. Even then, there are no silver ETFs (Exchange Traded Funds) listed on Indian Stock Exchanges due to various regulatory issues. Hence investors look for indirect ways to invest in silver ETFs in the US markets by opening international trading accounts with Indian Banks like ICICI, Kotak and HDFC.
Need for silver trading market
- Hedging: A robust market for silver trading is widely sustained due to the hedging requirement for industrial users. Manufacturers and wholesalers use futures contracts to lock-in their buying or selling price of silver raw material and inventory, and protect themselves from price fluctuations.
- Speculation: On the other hand, speculators take the opposite positions on silver contracts if they feel confident about their prediction of the future movement of silver prices, and seek opportunities for profits. Their profits (or losses) can be multiplied several times due to leveraging facilities.
- Arbitrage: Arbitragers try to capitalize on small price differences between different silver markets to make profits. They largely contribute to price uniformity across the different markets such as spot and futures markets, cross country markets, etc.
- How can I invest in silver in India?
You can invest in silver in the following ways
- By purchasing physical silver: This is not the best way, as there are various issues in storage of silver as you invest more and more money.
- Through commodity futures: You can open a commodity demat account with NSDL and trading account with NSEL through a broker and start trading in silver.
- Through international account: You can buy an overseas trading facility through your bank or broker and begin investing in US in silver ETFs, silver futures and also in stocks of silver mining companies.
- Why should I invest in silver?
There are many reasons to invest in silver
- It is a hedge against inflation
- It is a hedge against falling stock portfolio
- It has outperformed gold and has a favourable gold-to-silver ratio
- Demand for industrial silver has grown while supply is expected to fall
- It is cheaper than gold.
- What is a silver futures contract?
A silver futures contract is an agreement to buy or sell silver at a specific price on a later date.
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