How to beat volatility in silver through SIPs

Investment returns are often not a straight line. There are crests and troughs. Volatility is a given in most of the asset classes and it is this volatility which adds dynamism to an investment experience. Commodities such as silver are highly volatile, but for investors who stayed invested with their allocation to the industrial metal over the last one year, the experience would have been rewarding. The 3-month return on silver (domestic price of silver as derived from the LBMA prices) was 25% and the 6-month gains were 27.3%. This is more than a silver lining to an individual’s portfolio. But, what if gains lose lustre? This is where a Systematic Investment Plan (SIP) can aid your purpose.

Why silver?

Silver is known for its ability to provide a hedge against inflation as its prices are highly linked to general price levels in the economy. Apart from this, the industrial metal is also an effective portfolio diversifier given that the asset classes’ price movements have very little co-relation to equities and other asset classes. Ease of transacting (buy/sell) through the stock exchanges and its highly liquid nature are all factors which work in favor of silver. And given that, the world is probably moving into a silver-intensive future, investors could gain from a measured exposure to silver. Silver has extensive application in modern environment friendly manufacturing, electric vehicles, solar panels, medical instruments, switches, satellites etc.

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However, what may deter investors with low risk-appetite is a fair degree of volatility in returns accompanied while investing in silver. A rolling-returns analysis based on LBMA Silver prices converted into rupee terms, rolled daily over 10 years, ended 2022, shows silver returns can be very volatile. One-year return for silver fluctuated within a band of minus 35% to 111% over this decade. During the last 10 years, 1-year returns on silver have been negative as much as 56% of the time. If you increase the period of investment, then returns improve.

SIP your way

So, if you want to capitalise on the gains silver brings over the long-term while hedging your portfolio from the volatility, SIP is a smart way to buy and hold the precious metal for longer periods. Systematic Investment Plans offer a good opportunity to accumulate gains from physical silver in small amounts through periodic installments.

Consider the phases of the worst returns for silver, such as August 2019 to February 2020, or more recently, June 2021 to October 2021 - SIPs done during these periods would have generated good returns thereafter as silver found its feet. This apart, silver performance, even during the last three global negative equity periods, has been better. During the subprime mortgage crisis, silver gained 13%, during the taper tantrum and the Covid-19 pandemic as well, silver outperformed equities. For an investor who would have invested via SIP, the returns would be even better, given the lower average cost of silver holdings.

Bright outlook

The demand for silver is likely to remain elevated given the improving global economic growth. A recent report from the Silver Institute indicated that at present the demand for silver exceeds supply. Given that it is not easy to ramp up the supply of silver, prices are likely to find good support. Consumption of silver is highest for electronic mobility and appliances, indicating increased future demand as more renewable energy and mobility solutions are adopted.

Investor take

From an investment perspective, silver is a good portfolio diversifier along with being an effective hedge against inflation. Given its limited co-relation with equities, the presence of silver aids in improving the overall risk-adjusted return of the portfolio. Investors can consider a 5% to 10% allocation to silver as a part of their portfolio. Investors with a demat account can consider investing in the Silver ETF and those without a demat can consider investing in Silver Fund of Fund (FoF) route. Investors can consider doing SIP in Silver FoF.

(The writer is the head of investment strategy at ICICI Prudential AMC)