Unlike gold, which is held mostly for adornment and security, silver wears two hats. It is a precious metal and also a working industrial material. This dual character makes its price behave differently from that of its yellow cousin, and it matters greatly to anyone considering an investment. Beginners who ask what is Silver ETF is often overlook this point, because the product simply tracks the metal’s price. Understanding what drives that price is therefore essential before you put money into Silver ETFs or any other form of exposure.
A Metal That Works for a Living
Silver is one of the world’s best natural conductors for electricity and heat. It can reflect light very well, making it very useful in many different products. The industrial sector makes up a large amount of overall demand, meaning that it is affected more by the economy than gold.
India uses silver in switches, contacts, circuit boards, soldering and medical devices. It can also be found in water purification, batteries, mirrors, brazing alloys and catalysts. The demand for silver can increase during busy periods in factories and construction. However, the demand can decrease if the industry slows down.
Solar and Electronic Sector
A very popular driver for demand is solar. Solar panels use silver paste to conduct electricity. Due to India’s drive in renewable energy, there has been increased interest within this sector. As more solar panels are fitted, whether on roofs, farms or utilities, the demand for silver increases. However, manufacturers are constantly seeking ways to reduce the amount of silver used in each cell. This can cause some of the demand to decrease.
The electronic and electric vehicle sectors also play a role. Modern vehicles have lots of electrical contacts and sensors. Charging stations use conducting parts. Silver can be found in smartphones, household devices and data devices. The amount of silver used is very little in each device, but overall it creates a steady increase in demand.
Jewellery, Utensils and Festive Purchases
Traditionally, silver is used in Indian households. People will purchase silver jewellery, coins, idols and puja items. This increases during Dhanteras, Diwali and the wedding season. As people earn more money and it is more affordable, silver becomes a good way to start investing for families who may struggle to afford gold. Light jewellery and gift items have become more popular with younger generations.
This can cause spikes in demand during festive periods. This can affect the local prices and premiums at retail. If you are investing through ET routes you won’t pay the retail premium but the actual price can increase due to the excitement in the market.
Supply Can’t Be Increased Easily
Most silver isn’t mined by itself. A lot comes from mining copper, lead, zinc and gold. This means if the price increases, miners won’t increase how much they mine. They tend to base their decisions on the primary metal they are mining. This means the supply doesn’t react quickly to price changes.
Some of the supply can come from recycling old jewellery, electronics and industrial waste. A large amount of silver is imported into India meaning the exchange rate of the rupee can affect the local price. If the rupee is weak, local prices tend to increase.
Why It Can Be Volatile
Silver has two main drivers, investment and industrial. This means it can be affected by lots of factors. If the economy is optimistic, silver can increase due to increased demand for industrial inputs. However, if people are scared of uncertainty, silver can increase due to increased demand for safe assets. During a slowdown, the industrial side can suffer but investors will be looking for safe assets.
The market for silver is smaller than gold meaning there can be bigger price movements when large amounts of money flows into the market. This can cause big percentage movements in either direction. Investors should expect quick gains and losses. You should not hold a large amount.
Top Tips
Look at general trends. Look at trends in manufacturing, renewable installations, automotive and consumer spending. This can give you an indication on how demand will be in the medium term. Look at the rupee. The currency can affect local prices.
Don’t hold too much. Due to the volatile nature of silver it is good to hold only a small amount. Often you will see it held as a small part of a diversified portfolio alongside equities, debt and sometimes gold. Invest regularly. By investing every month you can reduce the shocks and you won’t have to guess what will happen in the short term.
There isn’t just one factor affecting the price. There are lots of complicated interactions between demand, supply, currency and investor sentiment. Often predictions go wrong. Be curious and humble when investing. Hold a long-term view and have a clear plan. This will help you more than any predictions for the next quarter.