Quantitative easing, inflation and general economic and political uncertainty means that investors have been turning to gold, a popular safe haven in times of difficulty. However some market participants are turning their attention to silver in the belief that it is set to rise.
Asset manager Charteris believes that Silver is about to enter a sustained bull market that will take the price from the current level of around $32 an ounce to $165 an ounce by around the end of October 2015. "We expect silver to continue to dramatically outperform gold as the bull market in precious metals is by no means over," they say. "Our forecast for gold is for a rise to $2,500 but that is small beer to what we expect to see in silver."
Meanwhile, Chinese research institute Antaike predicts that demand for silver from China - which is already the second biggest consumer - may increase as much as 10 per cent in 2013 due to higher investment demand. Jewellery demand, which accounts for around a third of silver consumption in China, was up 19.3 per cent in the first eight months of 2012 compared with a year earlier. At the same time, government plans to expand solar capacity is also likely to further boost demand.
But there are reasons why gold is more popular than silver.
"Silver tends to follow a similar trajectory to gold and we expect investment demand to underpin prices," says Tanya Joyce, strategist at Barclays Wealth and Investment Management. "However, we would caution about choosing silver over gold. Supportive policy action is likely to support both gold and silver, but silver will probably remain more susceptible to speculative activity, given its weaker fundamentals, and is therefore likely to be more volatile."
Around 50 per cent of demand for silver is industrial, in contrast to gold which is largely driven by investment, jewellery and technology demand. This means silver is more subject to the economic cycle, according to Henry Lancaster, senior investment analyst at Coutts. He considers it to be more of a trading asset, which you need to buy and sell at the right time, than a core portfolio holding.
"While investment appetite is largely responsible for demand, a weakening of economic growth would dampen industrial demand," adds Stephen Barber, adviser to Selftrade on markets and economics. "Investors also need to consider the state of the dollar, in which these instruments are priced, and the impact of quantitative easing on exchange rates."
Supply of silver is also good, so it is unlikely that this will add upward pressure to the price.
Silver can perform better in an upward trend but when it falls then it does much worse than gold. It is also less easy to buy and sell than gold.
SILVER EXCHANGE TRADED COMMODITIES
If you decide that you do want to allocate to silver, exchange traded commodities (ETCs) are a good way to do it because they allow you to buy in small denominations. You buy shares in the ETC, for which the charges are typically low, although you will have to pay the broker's trading charges.
There are two main types of precious metal ETC, those that physically own the metal and those that buy futures. The ones that own the metal are best because the futures prices do not necessarily follow the price of the metal and when this is rising futures can underperform it.
This is because part of an ETC's return is made from selling futures contracts before their expiry date at a specified price and then reinvesting in more futures. If the price of futures has risen over the term of the contract, then the fund will have to pay more for the new futures than it gets for selling the ones it holds. But this can work in the ETC's favour if the price of futures falls over the given period.
Another risk is the swap counterparty, often a bank or insurance company. If this entity becomes insolvent or is unable to honour its obligation it puts the fund at risk.
There are around five physical silver ETCs listed on the London Stock Exchange:
|Fund||Total expense ratio (%)|
|db Physical Silver (XSIL)||0.45|
|db Physical Silver GBP Hedged ETC (GBP) (XSIH)||0.85|
|ETFS Physical Silver ETC (GBP) (PHSP)||0.49|
|iShares Physical Silver ETC (GBP) (SSLN)||0.4|
|Source Physical Silver P-ETC (USD) (SSLV)||0.39|
Source: Investors Chronicle
Year to date, these have tracking differences below the silver price of between 0.37 and 0.46 per cent. Mick Gilligan, head of research at Killik, suggests Source Physical Silver p-ETC (SSLV) because it has the lowest charge, at 0.39 per cent.
iShares Physical Silver ETC (GBP) (SSLN) meanwhile has a TER of 0.4 per cent.
If you want to hedge your currency exposure as silver is denominated in US dollars you could also try db X-trackers Physical Silver GBP Hedged ETC (XSIH). However, this has a higher TER of 0.85 per cent which eats into more of your returns.
Read more on How To Buy Silver
View the IC fund tips.
Visit our funds and ETFs page for fund profiles, interviews with fund managers and the latest fund news.
View our top 100 funds list.