When it comes to investing in precious metals, gold often steals the spotlight. But what about silver? It’s often called the “poor man’s gold,” but don’t let the nickname fool you—silver has been a valuable and widely used precious metal for centuries.
Like gold, it’s seen as a safe haven in times of economic uncertainty. So, should you consider investing in silver? Especially, when it outperformed Nifty 50 with a return of 22.5% in 2024.
In this blog, let’s explore why silver is important, how it has performed as an investment, and whether it deserves a place in your portfolio. Let’s break it down in simple terms.
Estimated read time: 5 minutes and 04 seconds
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Buckle up. Here we go!
Why Is Silver Important?
Before we dive into whether you should invest in silver, let’s first look at why silver plays such a significant role in today’s world.
1. Industrial Demand Dominates
Unlike gold, which is primarily used as a store of value or in jewellery, silver has a broad range of industrial applications. Approximately 65% to 70% of global silver demand comes from industrial use, making it critical to industries such as electronics, solar energy, and even medicine.
Silver’s unique properties, such as its high conductivity, make it indispensable in the manufacturing of smartphones, computers, electric vehicles, and solar panels. As the world moves towards renewable energy and advanced technology, the demand for silver is expected to keep rising.
2. Demand Outstrips Supply
For the last six years, demand for silver has consistently outgrown supply. And this trend is expected to continue. Mining silver is not a straightforward process; it is often a by-product of mining other metals like copper or zinc. The supply side simply hasn’t been able to keep up with this surging demand.
As more industries rely on silver for their products, and as technological advancements continue, the fundamental demand for silver looks extremely strong. This scarcity combined with growing demand sets silver apart from other precious metals, making it a highly attractive asset for the future.
The fundamentals of silver look amazing, with industrial demand showing no signs of slowing down and supply unable to keep pace. But does this translate into great returns for investors? Let’s find out.
How Have Investments in Silver Performed Historically?
Now that we understand the strong fundamentals of silver, let’s explore how it has performed as an investment. Has silver lived up to its promise, or is it more of a “fundamentally strong but underperforming” asset?
1. Historical Price Trends
Silver’s price has seen significant volatility over the years. For instance, during the 2008 financial crisis, silver prices dropped sharply, only to rebound and nearly triple by 2011. However, unlike gold, silver has not been able to maintain a steady upward trajectory.
Over the long term, silver has underperformed compared to gold. While it has provided returns during certain bull markets, it hasn’t consistently met investors’ expectations. Between 2010 and 2020, silver’s price growth was relatively muted compared to gold, despite the robust industrial demand.
2. Silver as a Hedge Against Inflation
Precious metals are often considered a hedge against inflation, and silver has served that purpose to some extent. However, silver’s industrial linkages make it more susceptible to economic cycles than gold. During times of high inflation, silver prices have risen, but not as consistently or strongly as gold.
3. Silver’s Volatility
Silver’s price is far more volatile than gold because of its industrial demand. Factors like changes in technology, supply chain issues, and economic slowdowns in industrial sectors have a direct impact on silver’s price. This volatility can lead to significant price swings, both upward and downward.
Since 2000, Silver has had an annualised volatility of 29%. This type of volatility is less common with gold with an annualised volatility of just 15%. (Source)
Has Silver Met Investor Expectations?
Despite the strong fundamentals, silver has not consistently delivered strong returns. While there have been periods of rapid price growth, these are often followed by sharp declines, leaving investors with mixed feelings about the metal.
Even in the last six years when demand for silver has consistently outgrown supply, Silver gave a return of 15.4% which is good but not amazing considering the supply situation and its volatility. (Silver Rate Source)
This creates a situation that’s somewhat akin to the stock of ITC. ITC has strong business fundamentals, excellent market positioning, and good profits, yet its stock price hasn’t performed up to expectations for years. Similarly, silver has strong fundamentals, but its investment returns haven’t quite lived up to the hype.
This puts potential investors in a tricky spot. If you believe that silver’s fundamentals will eventually drive higher prices, then you might feel confident investing in it. But there’s something else to consider.
Is Silver Really a Good Diversifier?
Investors often turn to precious metals like gold and silver to diversify their portfolios. But here’s the thing: silver doesn’t offer the same diversification benefits as gold.
1. Higher Volatility Compared to Gold and Nifty 50
Historically, silver has been far more volatile than both gold and stock market indices like the Nifty 50. While gold tends to move more gradually and provides a steady hedge against economic downturns, silver’s price swings are much more extreme.
- Over the last decade, silver has had price swings that were up to three times more volatile than gold.
- Compared to the Nifty 50, silver’s volatility is also much higher, which means adding silver to your portfolio could increase your portfolio’s overall risk rather than reduce it.
2. Minimal Improvement to Risk-Return Ratio
One of the primary reasons for diversification is to improve your portfolio’s risk-return ratio. Unfortunately, adding silver to your portfolio doesn’t help much in this regard. In fact, several studies show that silver does little to improve the risk-return profile of a diversified portfolio compared to other asset classes.
A recent study by Capitalmind found that silver only merits a small allocation (3%) when constructing a low-volatility portfolio. And silver plays no role in a more stable risk-adjusted portfolio with potentially higher absolute returns.
This makes silver a less interesting option for diversification compared to gold, which is often seen as a stable store of value and a strong diversifier in times of market stress.
Should You Invest in Silver?
So, where does all of this leave us? Is silver worth adding to your portfolio?
1. Not Ideal for Diversification
If your primary goal is diversification, silver isn’t the best option. Its high volatility means it can increase the risk in your portfolio without offering substantial improvements in returns. Gold is still the go-to metal for those looking for a safe-haven asset that provides stability.
2. Price Returns Haven’t Been Great, But the Future Looks Bright
While silver has underperformed compared to gold and other asset classes over the last decade, its future could be brighter. The fundamentals of silver—strong industrial demand, limited supply, and its critical role in technological advancements—suggest that prices could rise in the future.
3. A Small Allocation Might Make Sense
If you believe in silver’s fundamentals and are willing to accept the short-term volatility for potential long-term gains, then a small investment in silver could make sense. However, we don’t recommend investing more than 3% to 5% of your overall portfolio in silver. This way, you can benefit from potential gains without exposing yourself to excessive risk.
Final Thoughts
Silver is an intriguing investment option with strong fundamentals driven by industrial demand and supply constraints. However, its historical price performance has been volatile, and it hasn’t met investors’ expectations in the past. Unlike gold, silver doesn’t offer significant diversification benefits because of its higher volatility.
That said, silver’s future looks promising as industries continue to require it for technological advancements. If you believe in the fundamentals of silver, a small allocation of 3% to 5% in your portfolio could be a reasonable bet. But remember, silver should not be your primary asset for diversification or stability—it’s more of a speculative bet on the future.
In conclusion, while silver’s fundamentals look strong, its past performance suggests caution. Invest wisely and avoid putting too much of your portfolio into this precious metal.
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Still Curious?
If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.
Capitalmind – Silver’s Surge, Gold’s Hedge: Strengthening Your Equity Portfolio with Precious Metals
The Silver Institute – WORLD SILVER SURVEYS
Shankar Nath – I Bought Silver Instead of Gold .. and Here’s Why You Should Too
Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.
