As silver prices have surged in the last one year and are trading above the Rs 3 lakh/kg mark, investors should consider partial profit taking. An extreme price rally may trigger mean divergence in any security and silver rallies tend to be sharp followed by corrections.
Silver has higher industrial demand and also faces supply constraints, which makes it more volatile than gold. While the structural drivers such as supply tightness and investor interest are intact, near-term volatility can lead to sharp corrections. A partial profit-taking and portfolio rebalancing approach is more sensible than trying to time a peak.
Ross Maxwell, Global Strategy Operations Lead, VT Markets, says selling a portion to lock in gains is ideal. “Buying substantial holdings at peak levels, carries a higher risk-reward imbalance,” he says.
What should new investors do
New investors should adopt a systematic investment approach. Given the sharp swings in prices, staggered buying in silver ETFs is better, says Nirav Karkera, head, Research, Fisdom. “Spreading investments over time can help manage volatility and improve average costs,” he adds.
Asset allocation
While both gold and silver are considered safe-haven investments, investors must consider their risk appetite and time horizon. “Investors should follow an asset allocation strategy at this point in time, with 15–20% allocated to precious metals, and rebalance the portfolio periodically,” says Satish Dondapati, fund manager, ETF, Kotak Mahindra AMC.
Within that 15–20% allocation, a conservative investor may allocate 30% to silver and 70% to gold, while a more aggressive investor can take higher exposure to silver. Gold should remain the core precious metal allocation in a long-term portfolio while silver is better-positioned as a satellite allocation. “Investor may look to rebalance between gold and silver by allocating fixed proportion to gold for long-term investment while silver may remain a tactical option to play medium- to long-term price trend, ” says Tapan Patel, fund manager, Commodities, Tata Asset Management.
Silver ETFs
Before buying silver ETFs at current levels, investors should consider price volatility, the risk of interim corrections after a sharp rally and global macro factors such as interest rates and the US dollar. In order to evaluate silver ETFs, they should check higher liquidity in terms of trading volume, lower tracking error and expense ratio.