The silver market was marked by net disinvestment from 1990 to 2000. However, net silver investment began to emerge in the market in 2001 and has since accelerated, becoming an increasingly significant part of the global supply/demand balance. The key investment drivers are outlined in detail in the following justification. These can be summarized as follows: the outlook for supply and demand based on an analysis of market fundamentals; safe haven status, which is a reflection of the economic and financial context as well as silver's performance in relation to the price of gold. Additionally, depending on their time horizon, each class of investor will likely place a greater emphasis on either profit-making or wealth preservation (or a combination of the two).
Even though the aforementioned motives are significant, the manner in which they "play out" in the silver market and have an effect on the World Investment series will depend on the participation of various investor groups.
Hedge funds and mutual funds, for instance, dominate institutional investors, the most active group in the silver markets. Inflows into the silver market will target derivative trading on futures exchanges and in the over-the-counter (OTC) market, as well as tradable indices (such as the S&P GSCI and TR/J CRB), as they are attracted by silver's greater volatility and, as a result, its leveraged potential. Private investors, on the other hand, prefer allocated metal accounts and/or physical bullion products (ETFs, gold bars, and gold coins), and their primary motivation is wealth preservation.
Family and private wealth offices are also included in the final category of investors, which is referred to as "high-net-worth" (HNW). This is a separate category "on paper," but the lines between institutional and private investors are not always clear. In other words, the preferred investment vehicle and the investment drivers will overlap. As a result, larger HNW players will concentrate on the over-the-counter market, while smaller players will likely prefer physical purchases and exchange-traded funds (ETFs), though allocated metal accounts will also be built in the over-the-counter market.
3.2 Institutional Investors The rise in institutional participation in the silver market has been a major factor in the recent rise of silver price, particularly up until the beginning of 2011. In contrast to gold, where pension funds, as previously mentioned, have begun to play a more prominent role, hedge funds and asset managers have accounted for much of this growth. The latter will have a "buy and hold" mentality and a longer-term outlook, so this distinction is crucial. Their purchases of gold will also be part of a strategic reallocation, which is itself the result of a process of making decisions for the medium to long term.
This will show up in a variety of investment vehicles, most notably in the OTC and ETF markets. The activities of hedge funds, on the other hand, tend to be much less long-term and adhere to very different philosophies than those of longer-term players.
In terms of comprehending their involvement in the market, rising prices for precious metals over the past ten years have been instrumental in enticing the institutional community to invest in precious metals. However, the demise of Lehman Brothers resulted in the liquidation of many of these positions, primarily in the over-the-counter (OTC) and futures markets, with the intention of raising funds. For a variety of reasons, net investment demand did not resume until the second half of 2009, but this pattern continued into the beginning of 2009. First, record levels of industrial offtake and improving supply/demand fundamentals encouraged fundamentally based hedge funds to enter the silver market. Hedge fund participation in the silver market increased last year in response to the onset of the sovereign debt crisis. Investor participation has largely remained elevated in 2011 due to the persistence of Europe's debt issues and the downgrade of the United States' credit rating. However, institutional investors did significantly reduce their exposure to silver during and after the sharp rise and fall in prices in April and May. Even though the political and financial context is likely to encourage the rebuilding of these positions, albeit partially and somewhat tentatively, institutional participants have been significantly discouraged from returning to the market en masse due to the surge in volatility this price action generated, particularly in relation to gold.
