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How to Invest in Silver

If gold is the emperor of commodities, silver is the empress.

Indians have been attracted to silver for centuries. When it comes to investing in silver, it is second only to gold in value and as a hedge against inflation.

Due to the varied uses of silver, it is a combination of an investment as well as an industrial commodity.

The use of silver is limited in ornament and jewellery, though silver utensils are common in the upper socio-economic strata in Asia.

Silver is not just a precious metal. It also goes into industry right from artificial knee joints, to dentistry, to water purification, and photovoltaic cells for solar energy.

The emerging use of solar power using photo voltaic cells will ensure rising demand for silver. Photo voltaic cells use silver as one of the components.

What Makes Price of Silver Move?

Silver is both an investment and an industrial metal.

One of the most visible cases of investing in silver happens in the last quarter of the calendar year. Though the marriage season is also a trigger, it is a relatively minor one for silver as compared to gold.

Silver tends to be sensitive to interest rates, inflation, and energy prices, just like gold, though the sensitivity may vary.

Industrial activity, demand-supply forces worldwide, the movement of the rupee against the dollar, mining supply, and inflation are some of the price determining factors.

Silver tends to play "follow the leader" behind gold with a small lag.

When it comes to investing in silver keep in mind that it moves every 6-8 years in spurts and makes big gains or losses.

The attempt by the Hunt brothers to corner the silver market in the early 1980s, brought a zing of excitement to this commodity.

Investors witnessed pulsating action. This action was replicated in 2011. Silver is yet to recover from the big collapse of 2011.

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It's Time to Start Investing in Silver

Silver was listed on the MCX approximately 17 years ago. For most of the time since, it's been a slumbering giant.

Do you remember Kumbhakarna, Ravana's brother in the mythological classic Ramayana? He slumbered but when he walked, the earth shook. He would create havoc.

Silver is your Kumbhakarna. It does not move for years, but when it does, you better watch out!

Having made a peak at almost US$ 50 a troy ounce in April 2011, the price collapsed significantly, and it has been a bone crushing decline.

It's only because the rupee has depreciated against the dollar that silver prices have not really taken as bigger hit in India as they have in the international markets.

Now that same a weakness in the rupee is now going to drive prices of silver in percentage terms, possibly significantly higher, and give you returns that might compete or, even better, the return on gold.

A Covid Trigger for Silver

The top two producers of silver are Latin American nations - Mexico and Peru. Argentina, Chile, and Bolivia are also in the top 10.

These nations have been badly hit by covid and have to provide a significant stimulus to their economies.

They have also taken a huge amount of money from the international lending agencies and therefore have a good amount of overseas debt as a component of their GDP.

If they have to provide a big stimulus and find the money to service their debt to avoid a sovereign downgrade, they must sell their natural resources, in this case, silver, at higher prices.

In other words, the world's top silver producers have a very strong incentive to keep the silver price as high as possible.

When governments around the world took the decision to lock down non-essential services, they immediately shut down all mining activities.

1,600 silver mines across 32 Covid affected countries were shut down. This supply will take some time to come back.

On one hand we will have a spike in demand when the lockdowns are lifted. On the other hand, supply will not return to the market as fast.

Add to this is the demand from exchange traded products abroad. In the first half of 2020, investments in silver by exchange traded products reached an all-time high level.

Investing in silver makes sense.

How to Buy Silver

In the absence of ETFs (exchange traded funds), the only available options for investing in silver are physical purchases from jewellers or commodity futures.

The disadvantage of depending on commodity futures is the cost of carry (i.e. financing costs) which is unusually high compared to gold.

It makes sense to buy silver via bars and coins.

While investing in silver in the physical form you need to take care of the storage first.

You also need to buy it from a place where it's cost effective without compromising on the purity.

As far as purity is concerned, you should be vigilant. You should not get cheated. When investing in silver, always choose a reliable bullion dealer.

Then there is the issue of liquidity. A profit is booked on a financial transaction only when the investment is actually sold at a profit.

You should be even to sell it back to the same person from whom you have purchased. It should be liquid.

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Should You Buy Silver from MMTC or e-commerce Websites?

It's not a good idea.

The prices quoted by MMTC are 3-5% higher than in your local jewellery store.

In e-commerce sites the problem is, you could get gypped in a number of ways. If you were to buy your silver from a foreign e-commerce website, there is no guarantee that you'll get the stuff that you really want.

It will also need to pass the customs and in that case, you have to pay import duty and GST. It is better to buy locally from an Indian seller. Always go to a government approved jeweller.

Insist on hallmarking while investing in silver. Hallmark is bullion which has the stamp, the weightage, the purity, and the logo of the seller. That's like an undertaking which certifies the purity, weights, measures etc.

Also, insist on buying officially.

How to Trade in Silver

If you want to trade silver, here are the contract specifications on the MCX...

Trading unit / contract size - Regular - 30 Kgs / Mini lot - 5 Kgs - 99.99 % purity

Quoted size - Rupees / kilo

Maximum order entry size - 600 Kgs

Tick size - 1 Rupee

Daily price band - 4% +2% +3%

Initial span margin - minimum 5% (20 times leverage)

Maximum open interest permitted - 100 MT or 5% of the overall exposure whichever is higher

Contract tenure - 2 months

Number of series available - 4 series available for trade

How to Test for Purity

The simplest way of testing its purity is the rub test. The jeweller takes a black coloured oval stone, and they rub the bullion on that stone.

Experienced jewellers can make out whether the particles that are rubbed off on that stone are 14, 18, 22, or 24 karats, or the silver is 95, 98, or 99% pure.

However, what happens if the top one centimetre surface is pure silver but the centre is aluminium, steel or maybe just a rock?

You could get cheated.

In the rub test, the surface would appear to be pure, but the core would be useless. So the rub test is fine but pay a little money and go for electronic testing while investing in silver.

Let the machine test the entire surface, the entire body mass of the bullion that you buy. It will set you back maybe 100, 150 rupees. You will sleep safer at night.

Don't trust anybody at face value. Have your bullion electronically certified, preferably from a third party, not from the buyer, from a third party and get a certificate.

To know more about investing in silver watch this video...

Happy Silver Investing!

FAQs on Silver

1. How can we invest in silver in India?

If you're interested in buying silver in India, the simplest way is to buy it in physical form i.e. bars and coins.

You can buy these from a jewellery store. Always go to a reputed and government approved jeweller.

Be sure to test the silver for purity. A reputed jeweller will offer electronic testing. For a nominal cost you can be assured of the purity. Get your silver tested, certified, and hallmarked.

Hallmarked bullion is one which has the stamp, the weightage, the purity, and the logo of the seller. It's like an undertaking which certifies the purity, weights, measures etc. Insist on it.

Also, insist on buying officially, i.e. always with a receipt.

You also have the option of buying physical silver from MMTC and ecommerce sites. But we would discourage that. The prices quoted here will be higher than what you will find at a local jewellery store.

When buying in physical form, the responsibility of storage and security is yours.

You can also buy silver via ETFs.

Read all about how to invest in silver.

We also suggest watching this video - Do Not Buy Silver Before You Watch This Video.

2. What is Silver ETF?

This is the electronic way of investing in silver via the stock exchanges. It's basically a fund that invests in pure silver. Its price tracks the international silver price.

Here the purity is assured. The gain/loss in physical silver, will be closely matched in the silver ETF. You also don't need to worry about storage and safety.

Be mindful of the cost of the silver ETFs in the form of the expense ratio of the fund.

You will need to carefully select which silver ETF to invest in after considering factors like expense ratio as well as the tracking error. The tracking error is the difference in the movement of the physical price and the ETF price.

To know more about why silver ETFs are a good choice, we suggest Vijay Bhambwani's video - Silver ETFs: A Shiny New Investment.

3. Is silver more valuable than gold?

Gold is purchased as a precious metal and as a store of value. Silver, on the other hand has many uses.

It's a precious metal like gold but it's also an industrial metal of vital importance.

It has uses in solar power, 5G mobile technology, electric vehicles (EVs), and the usual store of value.

Without silver, you cannot have electric vehicles, you cannot have 5G technology, and you cannot have photovoltaic cells to make solar power.

Silver has therefore an industrial edge over gold. Up to half a century ago silver was a poor cousin of gold. That is changing with technological innovation.

Also watch this video to know Why Silver is a Shiner Investment than Gold.

Helpful Links to Videos About Investing in Silver