Silver, the white precious metal and close cousin of gold, has always got step-motherly treatment when compared to the yellow metal. Most of the investors hold gold as a hedge against economic downturn while silver is generally neglected. But does silver also have the same property like gold and can investors use this to diversify their portfolio? Our study of daily returns of gold and silver in USD terms since the start of 1980 shows that there is a correlation of 0.72 between them, which means they move almost in tandem. Therefore, logically speaking, silver can also be used in place of gold as an asset for diversification.
The testimonial to this is the gain in the price of silver last year during the period of economic uncertainty, just like the gain in the gold price. Silver reached a seven-year high in the month of August 2020 as concerns about a weak dollar and declining bond prices thrust investors to safe-haven assets as vagueness about the economy remained.
The price of silver has not declined much since then and is still trading above USD 25 per ounce, though it has come down a bit from its recent peak of USD 30 per ounce. If we compare the price rise of gold and silver since the start of 2020, silver has gained almost twice as much as gold.
Although the economy is a stronger footing now, the price of silver has remained intact. It is still trading at about USD 25 an ounce, more than a 50 per cent increase compared with last year and about a 70 per cent rise from five years ago. One of the reasons for such a performance is that the white metal has a peculiarity of acting as both base metal as well as a precious metal. It has immense industrial use. It is estimated that 56 per cent of the silver is used in industrial production and thus its price behavior is often linked with the state of an economy. The global economy according to International Monetary Fund is projected to grow at 6.0 per cent in 2021 and 4.9 percent in 2022.
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