Avenues to invest in silver

Satya Sontanam BL Research Bureau | Updated on September 10, 2020

Unlike gold, investment avenues for silver in India are limited

Silver — the poor man’s gold — has grabbed the attention of investors recently on the back of the stellar rally witnessed in precious metals, gold and silver, this year. As per the London Bullion Market Association, the price of silver has skyrocketed from $17.11 per ounce in December 2019 to $27.43 per ounce now recording year-to-date returns of about 60 per cent.

Unlike gold, the investment avenues for silver in India are quite few. Here, we look at some of the platforms available to bet on the prices of silver, than buying physical silver.

Silver prices can be highly volatile at times and may not be for the faint-hearted. Navneet Damani, VP – Commodities Research, Motilal Oswal Financial Services, says, “Silver prices could be range-bound for years without giving any returns or it could be highly choppy within a short span of time.” He adds, “Investors with a high-risk, high-reward appetite should only be trading / investing in silver, and precious metals as a complex should be around 7.5-10 per cent of an individual’s portfolio.”

Silver F&O — compulsorily deliverable

If you want to bet on silver prices, you can consider trading in the metal’s futures market that offers short-term contracts. In India, the Multi Commodity Exchange (MCX) has higher number of active futures contracts of silver currently compared to other exchanges.

The MCX Silver futures prices have risen by about 40 per cent to ₹68,376 per kg now since the beginning of this year.

You can take any position (buy/sell) in these silver future contracts that are available in three sizes — 30 kg, 5 kg (Silver Mini) and 1 kg (Silver Micro). The maximum quantity of silver on which one can enter into a futures contract on MCX is 600 kg per contract.

In the futures market, you do not have to invest the whole value of the contract; you have to put up the margin money only. For instance, if you bought a Silver Mini futures contract of 15 lots worth, say, ₹50 lakh, you need to pay, upfront, only the initial margin. Margin is calculated as a percentage of the contract value and is minimum 8 per cent in case of silver futures contracts on MCX. In our example, the minimum initial margin will be about ₹4 lakh.

A beginner could consider choosing small contracts to keep risks low. Also, trading in large lots will have a higher contract value and thus a higher margin requirement.

In commodity futures contracts, in addition to initial margin, extreme loss margin (minimum 1 per cent on MCX for silver) and additional/special margin in case of higher volatility, if any, in the contract at the end of each trading day is charged.

All MCX silver futures contracts, that are open on the expiry date, have to be compulsorily physically settled at the exchange. In our previous example, the buyer of the futures contract has to take the delivery of 75 kg (15 lots*5 kg) of silver if the buy position is still open on the expiry date.

However, you don’t have to hold the position until the expiry date. You can square off your position (close the open positions by buying counter positions) any time before the expiry date. Or you can also choose to roll over your position to the next contract period.

Other than MCX, silver futures contracts are also available on the leading stock exchanges in India — BSE and NSE; here too, they are in the nature of compulsorily physically deliverable contracts. As futures contracts for commodities on these platforms are relatively new, the liquidity for these contracts is lower.

Further, in addition to the futures market, one can also trade on silver in the options market. An options contract, on paying some premium, allows the holder to buy or sell an underlying security at a given price, known as the strike price. In the case of silver options in India, the underlying asset can be either the silver futures contract or the commodity-silver, itself. The difference is how the delivery of the contract takes place on the expiry date. When the underlying asset is silver, the option holder gives/takes delivery of the metal depending on the position taken. But when the underlying is a silver futures contract, the open position shall devolve into futures contracts (long/short), on the expiry date.

While the options contract on silver on the BSE/NSE has silver itself as an underlying asset, MCX’s active option trades have silver futures as underlying assets.

Unlike equity, in the commodity derivatives segment, the liquidity for options is lower compared to futures. So, take appropriate care while entering into such contracts.

Bullion index — mix of gold & silver

If compulsory physical delivery is something that is deterring you from investing in silver, you can consider commodities index futures — MCX iCOMDEX Bullion Index. These MCX Bulldex contracts are cash-settled.

From the beginning of this year till now, the bullion index has gained nearly 30 per cent.

The catch here is that this index does not take its reference only from silver prices wholly.

MCX’s bullion index has gold (1 kg) and silver (30 kg) near-month futures contracts as underlying. The value of the index fluctuates based on these underlying commodities. The weights of gold and silver in the index for 2020 are 70.52 per cent and 29.48 per cent, respectively; these weights are revised annually.

This diversification potentially reduces volatility in comparison to single commodity exposures.

Sriram Iyer, Senior Research Analyst, Reliance Securities, says “The movement of the underlying bullion index depends on the gold and silver futures contracts. So, the rough calculation is, for every ₹10 movement of gold, the index movement will be close to 2.38-2.40 points, and for every ₹10 movement in silver futures, the index movement will be close to 0.6 points. The overall movement in the index, if gold and silver both move ₹10, will be close to three points.”

The maximum order size is 80 lots per contract while one lot is worth ₹50 * MCX iCOMDEX Bullion Index.

Bulldex contracts also come with a minimum initial margin (minimum 5 per cent) and an extreme loss margin (minimum 1 per cent) in case of high volatility.

ETFs abroad

Note that derivative products, especially in commodities, are for sophisticated investors as they are slightly complicated than stocks, and lack of knowledge in operations could lead to losses.

Thus, Indian investors who wish not to trade derivatives but want to stay invested in the metal can choose silver ETFs (Exchange-Traded Funds) listed in the US.

A number of large Indian brokerages have tie-ups with foreign brokers to facilitate investment in foreign stocks and ETFs. ICICI Direct and Kotak Securities are among the brokerage firms in India that have tie-ups with foreign brokers to facilitate investing overseas. You can open an account through them and invest in foreign silver ETFs.

Indian investors are allowed to remit up to $250,000 per annum to foreign countries for many purposes, including investments, under the RBI’s Liberalised Remittance Scheme (LRS).

Published on September 10, 2020

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