Silver hits four-year low

Metal hit by fall in demand from local markets due to reduced manufacturing activities

Silver prices hit a four-year low in Zaveri Bazaar here on Saturday, owing to a fall in demand from local markets due to reduced manufacturing activities.

On Saturday, silver fell 2.5 per cent to close at Rs 40,000 a kg, the lowest since November 17, 2010. Between July 20 and August 20, prices fell eight per cent (on July 20, it was quoted at Rs 43,550 a kg).

In dollar terms, the price has fallen about 30 per cent since November 17, 2010. However, in rupee terms, the fall was capped due to depreciation in the Indian currency. On Friday, the rupee closed at 60.83 against the dollar, compared with 45.31 four years ago.

“Silver prices have returned to the levels seen before the financial crisis that started in 2008 and before quantitative easing (QE) was introduced. It might, therefore, well be into the process of discounting the prospects of an end of the QE. For now, however, that seems to be one of the reasons behind the price weakness. The weakness is also justified by weak fundamentals, which show a large supply surplus . Now that investors are not buying much silver through exchange-traded fund (ETFs), less of the supply surplus is being absorbed. That means more of the surplus has weighed on prices,” said a recent report from Scotiabank.

Since 2010, demand of silver for industrial fabrication has fallen consistently---from 643.2 million oz to 586.6 million oz. Fabrication accounts for about 55 per cent of global demand for silver.

Investor appetite has shifted towards riskier assets, including equities. Consequently, investments in ETF have seen huge sell-offs, which weighed on prices. Fears of the Chinese economy cooling have also hit prices.

“Silver might see the next support level at $15-16 an oz, or Rs 36,000 a kg, after breaching the first support level of Rs 38,000 a kg,” said Gnanasekar Thiagarajan, director of Commtrendz Research.

The long-term demand outlook for silver is strong, though a few more years of surplus are expected, which might result in range-bound prices, possibly at lower levels. Silver stockpiles are enough to cover any potential shortfalls, and the projected fall in prices this year and the next is likely to be driven by sentiment, rather than fundamental factors.

“We expect silver prices to trade lower, as growth in the US economy is gaining traction and the dollar index is trading at four-year highs,” said Prathamesh Mallya, senior research analyst, Angel Broking.