Is silver the new gold rush?

Oh babe, you got my soul
You got the silver, you got the gold.

The Rolling Stones songwriter and guitarist Keith Richards apparently penned the song 'You got the silver' for his then-girlfriend Anita Pallenberg way back in 1969, but the lyrics could easily be meant for modern-day silver funds, which have sparkled like a retro disco outfit and ignited white-hot investor interest in recent times.

Don't just take our word for it. Silver funds have zoomed 29 per cent in the last 12 months and a whopping 32.39 per cent in the last three months, which is almost double that of the next best-performing category (gold funds). The outperformance is primarily driven by China's stimulus measures and heightened geopolitical situations in the Middle East and Russia-Ukraine. In terms of its 1-kg price, the white metal is just around Rs 10,000 shy of hitting the Rs 1 lakh milestone.

Given the solid performance, it's no wonder the number of silver funds has also swelled to 19 since 2021; the 20th is on its way, with SBI Mutual Fund filing an offer document for an ETF-based fund of funds (FoF). This FoF intends to invest in a bunch of ETFs (exchange-traded funds) instead of replicating just one market index.

You got the silver, you got the gold
You got your love, just leave me behind
I don't care, no, that's no big surprise

The ending of Richards's 'You got the silver' is a bit of a downer, which can perhaps also be interpreted as a cautionary tale for investors eyeing silver funds. While silver is obviously used in jewellery, it serves an important function as an industrial conductor, too. This is what makes silver prices volatile. Since it is subject to the economic theory of demand and supply, prices of the white metal can head south or be unstable during economic slowdowns and recessions.

Its long-term performance underscores silver's volatility. If you look at the accompanying graph, you can see that while silver shot up from Rs 26,323 in May 2009 to Rs 61,137 two years later in the aftermath of the Global Financial Crisis, its price either fell or remained stagnant for almost nine years after that. Nine years. That's a heck of a long time to wait for a turnaround.

Our take

Silver, like gold, is a commodity; it is not an asset class that can help you build wealth in the long run. Silver's nine years of zero or negative returns is a testament to that. For those seeking to invest for wealth creation, we strongly advise considering equity. Equities have a proven track record of helping investors achieve financial goals at a faster pace, provided you have at least a 5-7-year window.

However, if you are already a seasoned investor and looking to further diversify your investments, you can allocate a tiny fraction of your money in gold. Not physical gold, not gold funds or ETFs, but sovereign gold bonds. That's because the government-backed paper gold has additional advantages like a guaranteed interest of 2.5 per cent over and above the appreciation in the price of gold. Moreover, capital gains on maturity are also tax-exempt.

Also read:
Three reasons why gold has surged 20 per cent in last one year
Gold prices are rising. How high will it climb?