Silver's one-year-high rally: What lies ahead

Hareesh V 

Silver prices rallied to a one-year high in key global markets on expectations of U.S rate cut and increase in physical buying of silver-backed ETFs. In the key London spot market, prices gained more than 9 percent since the start of July. Similar moves were seen in Indian markets too, with the most active MCX futures prices jumping to one year high.

As a safe haven investment option, silver-backed ETFs have become more attractive to investors in recent weeks, owing to its low cost compared to other precious metals and better risk-reward ratio that the white metal offers.

Earlier, silver prices were under deep pressure due to lacklustre industrial demand 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.

Dovish comments from the U.S Federal Reserve and China’s growth worries also prompted investors to bet on the precious white metal. Comments from the U.S Federal Reserve reinforced bets on the U.S central bank cutting interest rates by as much as half a percentage in the next meeting. Gold and silver prices are highly sensitive to interest rate-cuts as they lift the opportunity cost of holding non-yielding metals like bullion.

The downbeat growth in China’s economy and sliding equities in the early days of the month boosted the sentiments in precious metal complex. Escalating tensions between Iran and other western countries too bolstered prices further.

Meanwhile, investors are now largely tracking the U.S FOMC policy decision at the meeting scheduled at the end of July. A cut-down in the interest rates could play a major supportive factor that is likely to drive the precious metals complex the rest of the year.

The recent price rally in silver spot prices caused a drop in Gold –Silver ratio. Gold- Silver ratio, the amount of silver required to purchase one ounce of gold, recently dropped to 87 ounces. Since early July, silver in the global platforms witnessed improved safe haven appetite while gold prices slowed down in the last few weeks after a sharp rise in June.

Silver-backed ETFs posted an increase in its holdings, indicating a higher demand for silver from investors. The key silver trust was adding up the physical holdings constantly since June 2019. Besides, silver-backed exchange traded funds across the world had witnessed growth in holding levels in the last few weeks.

As per Silver Institute data, the global demand of silver increased by 4 percent in 2018 particularly driven by silver bars and jewellers. The demand from India was exceptionally strong with the jewellery demand from the country jumped up by 16 percent.

Meanwhile, the global silver mine production fell by 2 percent in 2018 for a third consecutive annual decline. This was due to supply disruptions from Canada, Guatemala and the United States. The supply of scrap silver too fell due to low price which discouraged suppliers and consumers from recycling their silver valuables.

Looking ahead, despite hopes of feeble industrial demand from China and weak global growth forecast, there is likely to be a higher demand from the Electronic Vehicle and Solar Panel segment.

Similarly, jewellery demand from countries like India may remain high due to its competitive price advantage against gold. Anyhow $17.50/20.50 levels would act as stiff resistances while $13.60 likely to obstruct further downside in the immediate run.

The Author is Head of Commodity Research at Geojit Financial Services.

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