Few silver linings for alternatives

This article is part of
Precious metals - July 2015

They may not have the same appeal to investors as gold, but other precious metals such as silver, platinum and palladium can provide an alternative means of achieving diversification away from bonds and equities in a portfolio.

While demand for gold is driven by the jewellery market, silver and other precious metals are mainly used for industrial purposes.

Thomas Holl, portfolio manager of the BlackRock Commodities Income Investment Trust, points out that China and India vie to be the world’s largest gold consumers. But in 2014, demand for silver in India shot up by 47 per cent year on year following government restrictions on gold imports, which were subsequently lifted by the end of the year.

Article continues after advert

“Investment demand is arguably not the largest influence in this market,” Mr Holl says. “In 2014… the largest source of demand came from industrial fabrication [electronics, solders, photography] at 56 per cent.”

Meanwhile, jewellery accounted for 20 per cent of global silver demand and coins for 18 per cent, he adds.

As Adrian Ash, head of research at gold and silver bullion exchange BullionVault, observes: “Silver’s greatest demand comes from China, the US and Japan for industrial use – the US for coins; India for bars, jewellery and silverware.

“Retail demand is very price sensitive worldwide – art auctioneers pleaded with UK households to stop selling silverware for scrap at the top of the bull market in the 1970s and 2000s, and India’s total silver demand has jumped to record levels thanks to gold’s relative strength, and higher tariffs and import barriers imposed by [its] government.”

Their use in the industrial sector means the price of platinum, palladium and silver are generally much more exposed to global macroeconomic conditions.

Roland Khounlivong, head of dealing and settlements at online dealer GoldMoney, observes of palladium: “This is a much more focused auto industry type of metal. In terms of dynamics, if we think the local economy is buoyant, investors might expect a jump or increase in demand in the auto industry because households will renew their cars much more frequently than in the recession phase.”

He acknowledges that demand for platinum and palladium is much more driven by the economic outlook than gold, which he believes displays “a standalone type of behaviour” due to its unique characteristics and historical significance.

So with the ongoing Greek drama, softer economic sentiment in China and the prospect of a US interest rate rise later this year, what does all this mean for precious metals?

In ETF Securities’ Commodity Monthly Monitor for June and July 2015, it states: “Although concern about Greek finances remains elevated and has resulted in continued rising volatility across a range of asset classes including commodities, gold and silver have not benefitted as much as we would have expected.”

The report’s authors caution that expectations of tighter monetary policy in the US and a stronger dollar have capped any potential upside for precious metals.

“Silver stockpiles remain elevated and sustainable gains are unlikely until industrial demand can make inroads into inventory levels,” they note.