Why silver prices are rising so sharply

Silver prices are up over Rs 9,000 per kg, or 17.5%, so far this week in India; the rally has been so dramatic as silver has benefitted on both fronts -- being a precious metal as well as an industrial metal.

Hyderabad: Silver has widely been called gold’s poor cousin, or sometimes even poor man’s gold. But with last week’s thunderous rally, silver prices have managed to steal the spotlight from gold, at least temporarily.

Silver has gained over Rs 9,000 per kg, or 17.5%, so far this week in India and has skyrocketed nearly 70% from the levels seen in March this year. In the futures market, silver prices on Thursday hit an intra-day high of Rs 62,400 per kg, their highest levels in over nine years. International silver, meanwhile, was trading at around $22.79 per ounce.

The recent jump in prices has been dramatic as silver has benefited on both fronts -- being a precious metal as well as an industrial metal. Prices were initially heating up tracking gains in gold, which had hit a record high of Rs 50,700 per 10 gm in futures trade in India as investment demand for precious metals rose amid uncertainty around the global pandemic, the US-China trade war and hopes of fresh stimulus.

But the rally gained real momentum when there were bets on increased industrial demand for silver, mainly used in solar panels and other electronic products. On Tuesday, leaders of the 27 European Union countries hashed out details of what is being touted as the world’s largest green stimulus package.

The EU members settled on a package that earmarked a collective $630 billion for spending against climate change. Meanwhile, in the US, Democratic presidential nominee Joe Biden also put clean energy at the centre of his $2 trillion plan to revive the economy.

Now, silver is an intrinsic element in the production of photovoltaic cells which are used in solar panels or even automobile components. Experts worldwide believe that evolving green energy technology and growing electrification in the auto industry are going to drive demand for the metal.

Prathamesh Mallya, assistant vice-president (Research), Commodities and Currencies at Angel Broking, said: “Firmness in gold prices, rebound in industrial activity across the globe amid hopes for COVID-19 vaccine and a weak US dollar have played a key role in the silver price rally in recent trading sessions.”

“Rise in investment demand for silver is evident in the iShares ETF trust wherein the holdings stand at record highs of 16,379.08 tonnes, which is also pushing up the prices further,” added Mallya.

To add to the situation, silver production this year has taken a massive hit as project shutdowns, construction delays and social distancing measures have contributed to a decline in silver mining. A research report earlier said that an equivalent of 65.8% of yearly global silver production was still on hold as of 27 April.

Technical factors

But Mallya pointed that besides the fundamental reasons behind the silver price rally, there are other technical factors at play, too. “Silver is a commodity that is more used for industrial purposes, however, the recent rally in the silver prices is more of a technical breakout of key levels (above $18/ounce). Taking into consideration the actions of the central banks, the easy money policy (in the US, Europe, Asia, Japan) is chasing for higher yields, and silver is getting its share very fast and hence, the rally,” said Mallya.

Investors also think that the gold-to-silver ratio is still favourable for silver. The gold-to-silver ratio represents the number of ounces of silver it takes to buy a single ounce of gold. When the ratio is high, it generally means silver is available at a cheaper price than gold and has room for some price appreciation. Conversely, a low ratio tends to favour gold.

The gold-to-silver ratio stood at 83 on Wednesday. Though it is down from the 120 levels in March, it is still higher compared with the long-run average of 66, indicating at further increase in silver prices.

Mallya shared this optimism. “We hope the momentum will continue in the coming weeks and silver prices may further extend towards Rs 67,000 per kg till this Diwali… and may eventually move higher towards previous lifetime highs of Rs 74,000.”

(ETV Bharat Report)