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Rediff.com  » Business » Funds of gold and silver

Funds of gold and silver

By Devangshu Datta
Last updated on: March 25, 2006 07:43 IST
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Over the past two years, most of the attention in the precious metals markets has been devoted to gold. The yellow metal has moved to 25-year-highs in a trend correlated to rising crude prices, fears of high inflation and a weak dollar.

Almost unnoticed, silver has also gained steadily. In the very recent past, it has outperformed gold, gaining over 20 per cent since January.

Last week, spot silver hit a high of $10.59/ounce in New York, which translated to Rs 14,720 per kg in Mumbai. This has been the best price since October 1983. At those rarefied levels, demand dropped off and the metal saw a correction to around Rs 14,400.

Nevertheless, global silver prices are liable to remain pretty strong over the medium-term. Silver doesn't possess a profile absolutely comparable to gold, although there are many points in common.

Some key differences, however, are that silver is not quite as sensitive to inflation and it has more uses as an industrial commodity.

The two metals trade in very much the same direction, and inflation expectations remain high. There is also the fear of currency volatility given the record deficits that the United States is running. Again, precious metals tend to be a natural hedge against currency volatility.

The third reason for the jump in silver prices is technical. The US Securities and Exchange Commission has approved the launch of an Exchange Traded Fund backed by silver.

This will be launched soon by Barclays. The new instrument is expected to make trading easier and hence, it should go some way towards boosting liquidity and demand.

ETFs are designed to reflect the price of an underlying, such as a stock index or gold, and they trade like listed stocks on any exchange.

Any ETF makes it easier to trade since it deals in small, easily affordable units and the margin needs drop due to the lack of physical delivery expectations. Silver is normally priced in dollars per troy ounce in the US (equivalent to around 29 grams) and the kilogram is the minimum commodity lot in most markets.

This means a minimum outlay of $350-plus per trade. The ETF could bring that basic unit down to a little less than one-third, resulting in sharp liquidity gains.

The ETF would be backed by bullion held in London, with each issued unit worth about 10 ounces of silver or approximately 290 grams. Apart from anything else, the raising of the bullion required to back the ETF will buoy short-term demand.

In analogy, gold ETFs launched in the past three years have proved very popular. Five such funds worldwide have collected over 460 tonnes of gold, and ultra-conservative investors such as pension funds have been among the most enthusiastic buyers of gold ETFs.

According to global estimates, there might be roughly 17 million kilos of silver available for delivery, including holdings by central banks, and this figure excluded jewellery accumulated by consumers over generations. So, there really shouldn't be a problem creating the deposits for the first silver ETF.

Indian commodity traders cannot, unfortunately, enter either gold or silver ETFs - the RBI has always treated precious metals like a quasi-foreign currency and thus far, regulations have prevented the creation of ETFs. But the commodity markets do allow trading silver futures and this could be a fairly useful hedge over the next year.

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Devangshu Datta
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