As a safe haven investment option, silver-backed ETFs have become more attractive to investors
The precious white metal, silver, started catching up with the gold rally and outpaced the yellow metal in the recent weeks. Silver spot prices in the key London market surged to a three-year high of $19.64 an ounce last week while domestic prices are hovering at its highest level since October 2013.
Silver has always been laggard of gold in price performance. Historically, gold triggers the initial move in bullion complex and, eventually, silver gains traction.
In the recent bull-run, gold gained about 20 percent since June while silver rallied more than 37 percent in the international market. Similar moves were seen in Indian markets too.
Silver has been under pressure till June due to lacklustre industrial demands and bearish sentiments in the entire metal complex. However, in India, the largest consumer and importer of the metal, prices were rather steady due to weak domestic currency.
The recent rally in silver is driven by gold which jumped to multi-year highs backed by increased trade uncertainty and global economic & political instability which lifted the metal’s safe-haven demand.
The investors’ drive for safer assets amid broad market turmoil assisted silver. Factually, silver is more volatile than gold. Hence, an increased speculative interest in the commodity also propped up the sentiments.
The rising hopes of policy easing by various Central banks added to the metal’s strength. The US Fed recently cut its rates by 25 basis points, and we can expect more cuts amid weak economic releases.
Gold and silver prices are highly sensitive to interest rate cuts as they lift the opportunity cost of holding non-yielding metals like bullion.
A decline in mine production and an increased demand from the jewellery sector further supported the trend. As per the Silver Institute data, the global silver demand increased by 4 percent in 2018 while the mine production fell by 2 percent.
It is the third consecutive time that the mine production recorded a decline due to supply disruptions from Canada, Guatemala and the United States.
The recent rally in silver caused a drop in the Gold –Silver ratio. The Gold- Silver ratio, the amount of silver required to purchase one ounce of gold, recently dropped to 81 from its July level of 93 – indicating silver is outperforming gold for the last two months.
Since early July, silver in the global platforms witnessed improved safe-haven appetite while gold prices slowed down in the past two weeks after a sharp rise since June.
As a safe haven investment option, silver-backed ETFs have become more attractive to investors. This is due to the low cost compared to other precious metals like gold and the better risk-reward ratio the metal offers.
ETFs were adding up physical holding since June 2019. Prices of the world’s largest silver-backed ETF, the IShare trust, is currently placed at three-year highs, and inflows are at record levels signalling increased investor participation.
Looking ahead, the downbeat growth in the Chinese industrial sector and slowing global economic activity are likely to weigh the demand.
However, its appeal as a safe asset is likely to outshine further amid broad market turmoil owing to tariff war worries, global recession fears, geopolitical tensions, lower bond yields and moderate performance of equities.
An increased jewellery demand due to the competitive price advantage against gold and a probable demand from the EV and Solar segment may offer lower-level support.
On the price front, though the near-term outlook seems bullish, an immediate correction cannot be ruled out. Stiff resistance for international silver is seen at $20.50/$22 levels with support placed at $17.40 an ounce.
However, the trend reversal point is seen at $15.70. Rs 51,500 per kg likely to act as immediate resistance for Indian silver followed by Rs 55,400. Major support is placed at Rs 43,000.
(The author is Head Commodity Research, Geojit Financial Services)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.