This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Feb 1 - 7, 2016.

Silver had been seen as a safe haven for investors in times of crisis until it peaked at US$48.70 in 2011 and then started to crash. The precious metal has been trading at between US$13 and US$19 per ounce over the past year.

According to PricewaterhouseCoopers’ (PwC) Gold, Silver and Copper Price 2015 report, silver traded between US$16 and US$20 per ounce in 2014 alone, demonstrating the volatility of the metal, which is used as a currency as well as an industrial commodity. 

Among the silver companies PwC surveyed, just over one-third (38%) said they expected the price of silver to increase in the next 12 months while 31% expected it to remain at current levels. The remaining 31% anticipated prices to fall further in the year ahead. 

“Silver, considered a hybrid metal for its use as a currency and in industrial applications, has been hit the hardest in the past three years, falling by more than half to below US$20 per ounce today. Silver is in a slump, but demand for the metal will continue, given its strength and thermal conductivity, which is used in a number of industrial applications, from electronics to automobiles,” the report declares. 

As the price of silver seems to have bottomed out for now, the million-dollar question is whether the poor man’s gold will make a comeback as a safe haven for investors in times of uncertainty and possible financial crisis. 

Jonathan Quek, founder of SilverMalaysia.com and author of Why Gold? Why Silver? Why Now?, says silver’s return as a safe haven depends heavily on the changes in the US Federal Reserve’s policy rate. 

“In the first month of the year, we saw the China market crash and the Fed’s policy rate indirectly cause the Standard & Poor’s index to fall 10%. Further rate hikes in the US will drive silver prices down as the dollar is expected to gain as the Fed tightens monetary policy,” he points out.

“So, is the market ready for the Fed to increase interest rates? If the US market collapses and if the Fed goes back to quantitative easing, we will see a comeback for gold and silver.” 

At this point in time, Quek favours silver more than gold as it is the most electrically conductive metal, has thousands of essential industrial uses and is second only to oil as the world’s most useful commodity. 

“Gold and silver are regarded as safe havens because they are the only form of currency that has not failed in the last 5,000 years. There is currently less investment-grade silver available on Earth for investors to buy than there is gold,” he notes. 

Quek says the similarities between silver and gold are that both are monetary metals, tangible assets and do not have counterparty risk. However, due to the margins, any increase in the demand for monetary metals will have a bigger impact on silver because the demand for it is more elastic than gold. 

“While I am bullish on the long-term prospects of gold, I am even more bullish on silver. Historically, one piece of gold could buy you 16 pieces of silver. Today, one piece of gold can buy you 78 pieces of silver. Therefore, as both gold and silver climb back into the next bull market, you can expect silver to climb even faster than gold,” says Quek. 

He says investors should determine their purpose for investing in silver when deciding whether to invest in physical or paper silver. “Some people buy into silver purely for paper profit. Hence, they should invest in paper silver.

“However, the main reason most people convert their paper money into physical silver is because they are worried about the collapse of the fiat currency system. This is the reason most investors choose to hold physical silver. If you cannot hold it, you do not really own it.” 

Daniel Foo agrees and suggests that investors opt for physical silver if they are preparing for a financial crisis and paper silver if they are trading silver as a commodity. The founder of silverinmalaysia.com and author of Practical Guide for Investing Silver in Malaysia says the issues to consider when investing in the precious metal are liquidity, spread, storage, maintenance and premium. 

Foo asks potential investors to consider these problems: How fast can you sell the silver in time of need? How big is the spread if you are relying on selling it back to the vendor? How much silver do you plan to buy and how do you intend to store it? Are you willing to spend your resources to deal with milk spots, that is, the white patches sometimes seen on silver bullion coins? And how familiar are you with the different types of silver premiums? 

Silver investment options such as Maybank Silver Investment Account do not make much sense to Foo because he thinks the spread is too high even though it solves a lot of the problems to be considered when investing in silver. 

From a holistic view, he says, silver is a good form of diversification for an investment portfolio. “Silver is a hedge against a financial crisis. When everything else fails, people turn to gold and silver. Between these two precious metals, in the last silver bull run, silver outperformed gold,” he points out.

“From an equity investing point of view, investors can see gold as the blue chip and silver as the small cap. As silver prices are 70% below their peak, it is a great bargain now. Having silver in your portfolio is like buying insurance in the financial world.”

However, he adds, one should not be overly geared towards silver because of the problems of liquidity, storage and maintenance. Silver has many industrial uses, but this does not make it a safe haven, says Foo, but rather a volatile commodity. “Silver only became a safe haven in a financial crisis,” he asserts.

Foo predicts three possible outcomes for the precious metal given the current economic outlook. “If the global economy tumbles, silver will be one of the safe havens investors can turn to. If the global economy does not tumble, and with China growing at a slower pace and India anticipated to continue growing at its current pace, cheap commodities will be in demand. That will drive up silver prices.”

If the global economy remains gloomy with neither boom nor bust, silver prices will continue to stay low until something triggers market sentiment to rush to silver again, he says. 

Foo is of the opinion that the recovery of silver prices is entirely dependent on investor sentiment. Given that commodity prices have been falling drastically in the past few years, the downside for silver is limited.

“Silver prices tend to be volatile and liquidity is low in Malaysia. If investors are looking for a safe haven, fixed deposits would be a better option. Silver is something you buy and keep for the next 10 to 20 years, and not caring if the price fluctuates in between. Those who invest in silver should use money they do not need in the next five years,” he says. 

Chris Gan, vice-president of Singapore Precious Metals Exchange, however, is less sanguine about silver than Quek and Foo. The author of two books on investing in silver points out bluntly that he would look at gold before silver in times of crisis as it is a better hedge against uncertainties such as geopolitical risk and inflation. 

Gan says silver can be a speculative bet which people with a bigger risk appetite can buy at a lower price to see if prices will rise when the overall precious metals market or commodities in general are moving. 

According to Nigam Arora, chief investment officer of the Arora Report, the volatility of silver was about 70% higher than that of gold between July 2006 and March 2014. During that time, silver only outperformed gold between November 2008 and May 2011. 

Thus, investors have to decide whether they are risk-averse or risk-taking at that point in time, Gan says. “The supply-demand characteristic of silver is also very different from gold. Sixty per cent of the demand for silver is driven by industrial need, while the demand for gold is driven by various factors, including investments and jewellery.

“In a possible economic downturn, which we are likely to face, the demand for silver for industrial use may be muted. This may limit the upside price potential for the metal.”

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