The Hindu Business Line : Silver: Not for the cautious!

If you had invested Rs 10,000 in silver precisely 10 years ago, it would now be worth Rs 16,153. The same sum invested in gold, would be worth just Rs 13,189. After tagging along as gold's poor cousin for four years, silver has recently come into its own.

But the behaviour of silver prices over the past 10 years shows that an investment in silver is certainly not for the faint-hearted! Not only is silver subject to much sharper price swings than gold; it is more likely to leave you with a hole in your wallet! Silver prices have registered negative returns in five of the last 10 years, while gold prices have declined only in three.

"It is the most volatile metal known to man," says Mr Bhargav Vaidya, a bullion analyst who advises foreign banks on their bullion operations. He adds that if you were to express the fluctuations in silver prices over the years as an average, it has moved by about 2 per cent every day!

Supporters of the white metal point out that unlike gold, silver is not bought merely for ornamental purposes or for speculation. Two-thirds of the silver used globally in 2003, went into the making of photographic film and electrical and electronic components.

But Mr Vaidya points out that it is the dynamics on the "supply" side, which infuse so much unpredictability into silver prices. Globally, much of the silver produced is derived as a by-product, when base metals or gold are mined. This is why silver supplies rise when the demand for base metals picks up, as in the economic upturn of the past year.

"Since silver is treated as a mere by-product, its supplies do not follow any predictable pattern," says Mr Vaidya. Last year, China was a major source of silver supplies into India, thanks to its rising domestic output of base metals.

Nor can you bet on silver prices moving faithfully in tandem with gold. Traders have traditionally used the gold-silver ratio (the ratio of gold prices to that of silver) to predict how the relative prices of the two metals will move. But in the Indian context, the two precious metals may move in opposite directions.

According to the MMTC, which is a leading bullion importer, Indian silver demand swings between 4,200 tonnes and 4,600 tonnes, of which about 200-300 tonnes comes from recycling of existing silverware.

On the demand side, a good monsoon can lead to a clamour for the "poor man's" gold, as farmers plough back earnings from a good harvest into silver.

Mr Vaidya estimates that this could lead to a spike of up to 1,000 tonnes in Indian silver demand! On the supply side, rising silver prices may prompt households to trade in their private hoards of silver for cash. MMTC says that during times of price rise, much of the demand could be met by recycling of existing hoards of silver.

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