Silver has caught the fancy of investors over the last one year. Silver trading volumes in MCX (Multi Commodity Exchange) have surged with silver accounting for 38% of total traded volumes in April-December 2011 up from 23% seen in 2010-11. Gold has taken a back seat to silver in trading volumes, accounting for 27% of total traded volumes in the MCX. MCX ranks number one in the world in silver trading volumes and ranks number two in gold trading volumes.
The sharp rise in Silver trading is due to the sharp rise in silver prices over the last three years. Silver prices had shot up from USD 9/oz to USD 45/oz, a five fold increase, over the 2009-2011 period. Silver prices touched peaks of USD 45 in January 2011 before falling to levels of USD 27/oz in December 2011. Silver prices are up again in calendar year 2012 to date with a rise of over 10%. The question is will silver maintain its uptrend in 2012 or has it seen peaks in 2011 and will not rise again to those levels in the near future?
Silver prices will stagnate/fall
Silver has been following gold prices higher since 2009 and has faced a similar patter of touching highs in 2011 and then falling. Gold prices have doubled since 2009 but have fallen by 10% from highs seen in 2011. Gold has underperformed other assets classes’ calendar year to date and its outlook for 2012 is not positive (read
The fact that silver has given five fold returns in the 2009-2011 period while gold has just doubled over the period has seen many gold investors turn to silver. Hence silver has become the most traded commodity in the commodity exchange in India. A fall in silver prices or even stagnant silver prices will hurt investors more given the shift from gold to silver trading.
There are a lot of expectations built on silver performing in the near term and the weight of the expectations will cause silver prices to stagnate/fall. The factors that affect gold also affect silver and the biggest factor that is moving markets at present is the improving US economy leading to a sustained USD strength. ( read
Silver has benefitted from risk aversion trades on worries of the collapse of the Euro, inflation in emerging economies and weak global economic growth. Silver is seen as inflation and currency hedge. The outlook for inflation in emerging economies is not negative given that inflation is down from peaks seen in 2011 and is looking to stay down due to growth coming off. India and China are seen at growing below trend levels in 2012 at forecast growth rates of 7.5%. Inflation in these countries are down from peaks seen in 2011 with China February 2012 inflation at 3.2% against 6.5% levels seen in 2011 and India’s February inflation at 6.95% against peaks of 9.8% seen in 2011.
The success of the Greek debt swap coupled with ECB lending over Euro 1 trillion to European banks has reduced fears of a collapse of the Euro. Bond yields of indebted nations like Italy that had gone up to unsustainable levels of over 7% have come off sharply on the back of the ECB actions. Eurozone may see a mild recession but a stronger US economy will help make it come out of the recession sooner than later. A stronger US economy can also help improve the prospects of the global economy.
Silver has to find other price moving factors for it go up on a sustained basis from current levels of USD 31/oz. The other factors could include the metal being seen more as an ornamental metal than as an industrialised one (90% of silver demand is for its industrial use). Demand-supply factors should tilt in favour of demand rather than supply. Central banks stock up on silver rather than gold for their reserves. However without speculative support for silver on the back of weakening macro economic fundamentals, silver prices are unlikely to trend sharply higher even if other factors mentioned here acts in its favour.
Macro economic fundamentals are beginning to strengthen rather than weaken at present and this will lead to silver prices stagnation or falling.
