You try convincing my cousin to buy some silver and I am pretty much sure you will never succeed.
Babi Roychoudhury, 45, a teacher in Ras Al Khaimah, is hooked on to gold and gold only. No amount of statistics or macroeconomic and investment arguments in favour of silver will force her to change her mind.
That is most likely to be the case with the majority of Indians here. Or, for that matter, with many Emiratis and other UAE expat communities. The number of gold shops, big and small in malls and supermarkets, attest to that. Dubai, the "city of gold", is famous for its gold souqs, which attract visitors from all over the world. Now you also have a gold ATM in Abu Dhabi's Emirates Palace hotel. So it's gold all the way ...
When compared to its industrial demand, silver has remained at the margin in terms of investor demand, more so in this part of the world. And so, precious-metals analysts and investment traders feel that this undervalued commodity could, in the current economic climate, be considered as one more attractive diversifier in an investor's portfolio.
People looking to hedge against inflation or worries about the equity or bond market, silver is like gold, say experts.
"It has a hard currency dimension to it," said James Steel, precious metals analyst at HSBC Securities.
"It's like money except that government can't print more of it. So hard currency as we know is a stable currency, a store of value, more like the Swiss franc used to be. But it's also got a strong industrial component to it."
Facts bear out that silver is becoming a better buy against gold and this trend has gathered momentum from mid-2003.
The gold-silver ratio, that is the amount of silver needed to buy a unit of gold, is on a steady decline. This hints at the additional demand for silver. From the highs of 80 in mid-2003, the ratio has slipped to as low as 67.
The metal has enjoyed double-digit gains every year since then, except 2008.
Though silver prices are more volatile than gold, the year-on-year returns have been higher than the yellow metal (see table).
In 2003, silver's annual return was 23.5 per cent compared to 20.1 per cent for gold. Though it had a negative return of 23.5 per cent in 2008, it came right back in 2009 to achieve a new high of 48.7 per cent last year.
Richcomm Global Services' senior analyst Pradeep Unni said the higher returns had led many traders and investors to buy silver and forego gold. He is of the opinion that silver is a more steady metal than gold and hence a better hedge because of its continuing industrial demand. It has different applications including in biotechnology, mobile phones, pharmaceuticals and electronic appliances.
Locally, trading in silver futures contract has seen a spike in the first six months of this year, according to Dubai Gold and Commodities Exchange.
"That is due to greater investor interest in the product and tighter spreads," said DGCX chief executive Eric Hasham.
"Volumes of silver future contracts for 2010 up to June-end reached 17,659 contracts compared with little activity in the same period last year." (see DGCX graph)
Silver was becoming more attractive in the current market environment due to increased volatility, prices, and its safe-haven attributes as a precious metal, Hasham said.
The metal had caught investors' eyes after the launch of the silver Exchange Traded Fund called the Barclays iShares Silver Trust in April, 2006 in the US.
The ETF has managed to siphon almost 9151.78 tonnes of silver to date, taking away a large junk of the total available supplies from the market. An ETF is structurally backed by the physical commodity such as gold and silver to approximate the net asset value of the underlying and is traded on stock markets as normal stocks.
The net asset value (NAV) of iShares' silver holdings has grown big since the launch of the Silver Trust.
From $263.65 million in August of 2006, it has jumped to $5.29 billion.
"When we went through the process of launching gold, the natural next step to having gold would be silver," said Norah Alyusuf, chief administrative officer of iShares, Gulf region.
"There was an investor demand for the product."
HSBC's Steel, who is based in New York, said as global economic uncertainties still remained with stocks in major markets on a downward slide, investing in precious metals, including silver, should be seriously considered.
"It would be a positive for gold and silver if bonds and equities do not find favour with investors, and there's certainly very good reasons why they wouldn't," said Steel during a telephone interview with Gulf News.
"You know rates are so low, one can hardly imagine them getting any lower for bonds. That certainly would imply that alternative assets like silver would be popular.
"And also, the fact that interest rates are so low is also positive because it reduces the opportunity cost of owning silver."
With economists divided on whether we would witness inflation or deflation and also the timing of one or the other — though there are some signs of inflation in some parts of the world, such as China, — it does appear it might be extreme in either case.
That's really where precious metals such as silver and gold have their benefit to an investor as a safe haven investment when the outlook is unpredictable, Steel said.
"When things are going quite well like in the 1990s and earlier this decade, precious metals performed poorly, but they performed particularly well during periods of uncertainty," he said.
Peter Cooper, a finance commentator who now runs the Arabianmoney.net website from Dubai, seemed to be more certain about where the markets were headed globally and the resultant appeal of precious metals. He said he believed that bond prices would soon peak as the stock market dropped to a final low in the current bear cycle. "Rising government debt and heavy borrowing will then nudge up interest rates world over. The world will be downward spiral for bond prices," he said. As real estate, stocks and then bonds ceased to be attractive investments, precious metals would truly come into their own.
"My money is on silver, but a mixed portfolio is the sensible way to tread," Cooper said, cautioning that silver too was volatile.
He noted that silver fell more than gold in the 2008 sell-off due to margin calls in a falling stock market.
Silver sold for $49.45/oz in 1980 and the recent (March 2008) high of $21.24/oz was less than half of the all time high. Gold on the other hand had surged to $1265/oz last month breaching its previous high of $1226/oz made in 2009. And then we saw a correction in gold more than a week back when it fell to $1198/oz.
Cooper said: "Today, silver is priced less than 30 years ago and could be considered the most undervalued asset around".
"This makes it a good investment, perhaps the best of all but wait for silver to bottom out in tandem with the stock market around October time; buy it then, not now," Cooper said.
Bank Sarasin's precious metals trader Rusca Diego shared similar sentiments in terms of price declines over summer.
Currently silver is trading around $17.95/oz (on Thursday afternoon).
"Silver is cheap but should lose some ground during the summer months," Diego said, adding that silver would start a strong up move when the inflation figure may start moving higher in the USA.
Diego said he would buy silver after a sell-off and his buying levels were at around $14.00.
"The next buy level and great support level is at USD 12.00," Diego said from Zurich.
"Long-term investors may buy silver after any weakness. Silver may start a strong rally when inflation figures may rise and I am convinced this will happen in the coming months."
With a dose of caution, Richcomm's Unni advised to stay invested, or to attempt fresh investments in the silver market as the bull market had sufficient upside potential.
"But riding the silver bull isn't easy task and corrections would have to be encountered on the path," Unni said.
"In the medium term, there are fair chances for the metal to sag below the $17.20/oz, but if it manages to sustain above $16.5/oz in the process, buying spree may get triggered again."
Investors of silver must keep in mind the metal's volatility and its correlation with the industrial metals.
A significant reduction in the global demand for electronic items may hamper demand, which could have a negative impact on the prices.
"Silver may not be as glittering as gold or may not carry the same flare in jewellery demand, but it is certainly far more rewarding from investment point of view," Unni said.
Ways to invest:
Bullion: Silver in the form of jewellery or bars, which are at least 99.5 percent pure. But as Rusca Diego of Bank Sarasin said, silver turns pale yellow after some months and one has to clean all pieces. "Silver is not a nice metal to keep in your own vault," he said.
Official Coins: Silver coins issued by a government mint.
Medallions (Rounds): A round piece of silver resembling a coin but not considered legal tender. Medallions may be issued by governments or private mints.
Futures and/or Forward Contracts: An agreement made on an exchange to take or make delivery of silver at a set date in the future. Dubai Gold and Commodities Exchange offers silver futures contracts.
Options: The right, but not the obligation, to buy or sell a silver or a financial security linked to silver on a specified date in the future.
Exchange Traded Fund: A basket of equities linked to silver, i.e. the physical metal, producers, refiners. ETFs are traded on exchanges throughout the trading day.
Mutual Funds: An open-ended fund that holds a basket of silver-related equities that are priced once daily.
(Note: Always consult a registered financial adviser as different forms of investment carries considerable risk.)
Do you think silver is an undervalued asset? Would you switch from gold to silver as an investment? Why or why not? Tell us...
