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Feb 22, 2013, 06.52 PM IST | Source: Moneycontrol.com

Why silver has outperformed gold

Emkay has come out with its special report on Silver. According to the research firm, the demand for silver can be seen higher in coming days as recent duty hike in gold has lackluster its demand. Indian rupee will also form a crucial part in determining the price of Silver.

Emkay has come out with its special report on Silver. According to the research firm, the demand for silver can be seen higher in coming days as recent duty hike in gold has lackluster its demand. Indian rupee will also form a crucial part in determining the price of Silver. One can Buy international silver at $27.00 (INR 52000) for the target of $31.00 (INR 56000) followed by $33.5 (INR 58500), says Emkay.

Both silver and gold are monetary metals. In times of uncertainty and high inflation, investors rush not only towards gold, but also to silver, especially in America. Silver is also extensively used for fabrication of silverware and jewellery, photographic, and other industrial uses.

Increase in the iShares Silver ETF holdings in recent years has also led to a sharp rally in silver. In 2012, iShares Silver ETF holdings was up by 13.15% whereas SPDR Gold holdings were up only by 7.67%.

The silver market is much smaller than the gold market, so a new dollar invested in silver has a much greater affect on the price. That makes silver more volatile than gold.

The most important indicator for the physical market is silver sales at the U.S. Mint. In mid December 2012, they shut down the sales of American Eagles for about 3 weeks due to shortage of coins

Gold demand from Chinese jewelry manufacturers was down by 9% in 2012. Household demand in India has also slowed down and the Indian government has been clamping down on gold imports to curb the current account deficit. The duty has been raised twice from 2% to 6%. Together, these two countries account for nearly half of worldwide demand, and weak demand there spells significant weakness for gold demand as a whole

Gold demand from all central banks was at 536 tonnes, up 17% from 2011. However, it accounts for less than a third of total demand from China and India combined.

In the mean time, gold supply has been stable. Global gold mining supply hit a new annual record in 2012.

China is the engine that has been driving world industrial growth. Positive outlook for China is likely to boost the demand for silver more than gold.

Silver v/s Gold- The silver market is much smaller than the gold market, so a new dollar invested in silver has a much greater affect on the price. That makes silver more volatile than gold, looking at the ratio of gold and silver we can see that on an average one percent move in Gold can show 2% move in silver as the coefficient correlation between both is 0.5(1:2). The demand for silver can be seen higher in coming days as recent duty hike in gold has lackluster its demand. Indian rupee will also form a crucial part in determining the price of Silver. As upcoming budget can show some positivity in Indian economy and also for Indian rupee, the prices of Silver can be down initially but physical demand in domestic and international market will drive the prices higher in later weeks.

Demand and Supply- Even if you look at the global physical demand & supply for Silver, the net implied investments have been growing tremendously within a year. In 2011 the implied investments have gone from 152.2 tonnes to approx 231 tonnes in 2012. This jump is majorly due to several events in 2012 such as QE3, Greece bailout etc. Similarly even 2013 is lined up with several events. One major event which came was Fiscal Cliff, followed by Sequester and many more to come. We will see the impact of these events on Silver directly in a positive manner, just like gold even silver has a safe haven appeal, people are rushing more towards silver these days as gold prices have been hovering around on its all time high.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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