Silver to see intermittent correction before rally starts

Kishore NarneMotilal Oswal Commodity BrokersSilver prices have slumped sharply in the past few weeks as the odds of a Fed rate hike have increased after a strong run of US data and dollar strength. The dollar index is at the highest level in nearly nine months as odds of a rate hike in December are near 70%. Similar to gold, silver is also sensitive to US monetary policy changes and the revival of rate hike expectations over the past few weeks has stemmed the price rally. Silver has been a prime beneficiary of institutional investment demand this year and investment inflows in global silver ETF’s have surpassed 1950 tonnes so far in 2016. While gold ETF holdings flat-lined over the past two months, Silver ETF’s saw robust inflows despite the price volatility with holdings up more than 900 tonnes in the last three months alone. Prices may however remain vulnerable to dollar strength in the near term given that speculative longs have remained elevated and investment flows have showed signs of slowing amid price weakness. In industrial metals, Silver closely tracks moves in copper which has been among the weakest in the industrial metals space as Chinese growth figures are not encouraging enough to bet on demand pick up. We believe silver will broadly follow gold’s price trajectory but could underperform relative to gold given that the silver market is forecast to record a growing fundamental surplus over 2016-17. The short term trend therefore remains weak which could provide opportunity for long term investors to take fresh entry. From a longer term perspective, main reason for our optimism on prices is that we see very slow pace of Fed rates hikes in 2017 and 2018. The underlying trend for precious metals will also remain bullish as the Fed’s ability to hike will be contingent on outcome of the US Presidential elections and other global factors. We believe that the larger bull trend is intact but Silver could see intermittent price corrections before we get any meaningful triggers for a fresh rally.