Many reasons for silver to fall further

Silver has witnessed a steep deterioration in November, with prices receding from a high of $22 an ounce and to about $20, currently. Initially, the precious complex was underpinned by dovish stance from the incumbent US Federal Reserve Chairman, Ben Bernanke and Janet Yellen as well (who will replace Bernanke next year). Bernanke stated the US central bank remains committed in respect with persistence of accommodative monetary policy as long as the situation demands. Akin to Bernanke, Yellen is considered to be dovish by the Street. In this respect, she has already backed persistence of the unconventional $85 billion monthly bond buying programme, as it seems to be the best way to restore the economy back to normal growth. The Fed has a lot of ground to cover in order to buoy fragile labour markets and the broader economy. One can remain lenient on rising prices, provided it increases output and in the process mitigates unemployment. Prevalent inflation rate in the US remains well below two per cent and implies the government has a lot of cushion and will not mind any short-term spike in consumer prices. Markets were trying to build a perception that Fed probably would maintain the monetary stimulus during the first few quarters of 2014.

However, the minutes of the October 29-30 Federal Open Market Committee policy meeting revealed several Fed officials were looking for ways to scale down the quantitative easing in a short course of time. Reignited concern of tapering by the Fed is currently dominating the market action.

Our stand on this issue is: The central bank cannot afford to taper the monetary stimulus for at least two quarters, considering the fact that budget and debt ceiling deadlines are lingering in the minds of US legislators. Budget Bill needs to be submitted by January 15, 2014, while debt ceiling expires on February 7. High probability of a political deadlock between US Democrats and Republicans may compel the Fed to stand pat on the monetary policy for quite some time. However, one cannot throw caution to the wind as Yellen can turn hawkish, if the situation demands so.

On growth side, the world's largest economy has witnessed some stability during this year. The economy continues to grow at a slow and steady pace, with preliminary third quarter GDP growth quoted at 2.8 per cent. Labour markets have improved, with the unemployment rate declining from nine per cent during September 2011 to 7.3 per cent in October 2013.

US housing industry has bottomed out and automobile markets remain robust. Consumer spending has also done reasonably well. These factors have convinced some Fed members that the time was apt to scale down the monetary aid. Nevertheless, jury is still out on the Fed's course of action.

Although there is ambiguity on the duration of the bond buying programme, we remain bearish on silver prices looking forward. The white metal is struggling amid uninspiring investment demand, whereby outflows remain consistent from the world's largest ETFs. On speculative front as well, non-commercials have decreased bullish bets on COMEX silver futures and options to a three-month low. Funds and money managers have clearly shown a nominal interest in most commodity investments, influenced by slower economic growth across the globe. In addition, subdued tone in the non-ferrous metals pack has added insult to the injury.

We have to understand that silver is more of an industrial metal rather than a precious metal. The newly proclaimed reforms from the just concluded Communist Party meeting in China imply tighter credit, higher interest rates, lower debt levels, strengthening yuan and reducing government aid for state owned enterprises. This will probably lead to slower Chinese economic growth over the short-term, which has negative connotations for the industrial metals pack as a whole. On price outlook, recent violation of $20.5-support level (on a two weekly closing basis) has paved the path for further weakness till $18 (a three-year low).

The author is director, India Infoline Commodities Ltd