Friday, May 3, 2013

Silver linings playbook

This article was originally published in Postnoon on May 2nd, 2013

After a long hiatus, Professor Nicky was back to the campus. After the cool breeze of the hills, the heat of Hyderabad summers was not helping her mood. The innumerable messages, mails and posts needed her attention, as also a long list of people who wanted to meet her. As usual, she took a cup of coffee and strolled out of the campus to clear her head. Just outside the campus gate, she bumped into Laxmiamma.
Laxmiamma was always a pleasure to meet. With a smile on her face, she greeted Nicky. But the smile was extra wide today.

Nicky: Oh hello there! What is the reason for your million dollar smile today?

Laxmiamma: First reason is that you are back....
Nicky: Thank you. What's the second?

Laxmiamma: Gold prices fell by more than 20% last month. I bought 50grams of my favorite metal. I will buy more if it falls further.
Nicky: You are above 60 years of age. Why do you need to buy gold now? I've never seen you wear any ornaments.

Laxmiamma: What does age have to do with buying Gold? And anyways I buy it as a security for the future, for bad times.
Nicky: Then why just Gold? Why not Silver as well?

Laxmiamma: Silver?
Nicky: Yes. While Gold has given a total return of around 325% over the last 10 years period, Silver has given a return of around 375% over the same period. And it is expected to give a much higher return than Gold in the future.

Laxmiamma: Why?
Nicky: Well, for one, the reserves of Silver have been going down, thereby making its supply limited. It is used in small quantities in many industrial processes. It is one of the most widely used commodity, with over 10,000 uses. Hence, the demand for silver is growing, but the supply is limited. Another parameter is the Gold-Silver ratio. The current ratio between the gold and the silver prices is approximately 1:60. Whereas, historically, this ratio has been around 1:15 to 1:20.

Laxmiamma: You are losing me.
Nicky: Sorry. What I mean to explain is that, either Gold is priced too high, or Silver prices are too low, or it's a combination of both. We can expect the Silver price rises to be steeper than the Gold price rises in the future. We should see a correction in the ratio.

Laxmiamma: So are you saying that I should not invest in Gold?
Nicky: No. I am not saying that. I am saying that Silver is also a good option and you should try investing in Silver too, if the aim is to invest. Anyways it is better to diversify your investments.

Laxmiamma: Yes. Like you keep saying, "don't put all your eggs in one basket"!
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