Silver outshines gold, Sensex in 2010

It is considered gold's poor cousin, but silver sparkled more than the yellow metal, as well as the stock market benchmark Sensex, in 2010 in terms of returns for investors.

The year saw silver shining more than the stock markets as the shiny metal soared to a 30-year high, with prices registering a whopping 65 per cent growth in domestic markets and a 75 per cent jump in the US.

In the process, it surpassed the Sensex, which saw a modest growth of a little over 15 per cent in the year gone by. Gold didn't glitter much as well, rising by just about 25 per cent during the year.

Analysts attributed the smart growth in prices of silver to the risky nature of equities, which prompted investors to shift their funds to safer havens such as precious metals, thereby enhancing investment demand.

"Amidst the ongoing European debt crisis and the Federal Reserve and other central banks pumping in money into economies to shore up the recovery, investors turned cautious toward the stock markets," said an expert.

"In normal circumstances gold is preferred as a safe bet for hedge against inflation, but looking at the historical highs of the yellow metal, investors turned their focus toward the 'poor man's gold (silver)' which was still on the sidelines," Unicon Securities Vice-President (Research) Madhumita Ghosh said.

A weaker greenback also boosted prices of silver, as commodities denominated in dollars became cheaper for holders of other currencies.

Apart from investment demand, the major factor which played a significant role in the rally in silver prices was inflationary expectations in the US, which triggered buying of the precious metal as a safe and alternate investment.

An analysis of prices for the year suggests that those having bought 1 kg of silver at Rs 27,200 per kg on December 31, 2009, have become richer by Rs 17,800 in 12 months, as prices rose to Rs 45,000 a kg by the end of 2010.

According to the US, geographical silver resources are depleting at a faster rate than other precious metals, including gold.

"Silver is a diminishing resource. At current consumption levels, all of the silver in the earth's crust will be depleted in the next 25 years. Above-ground silver supplies dropped 86 per cent last year," Globe Capital PMS Head K K Mittal said.

In addition, demand for silver peaks in the domestic market during Diwali and the wedding season, as purchasing the white metal is considered auspicious by Indians.

Notably, about half of the silver produced globally is consumed by manufacturers and other industrial users.

On the demand side, investment in silver has skyrocketed by over 500 per cent since 2007 and industrial demand for the metal has also increased over the past decade, despite a 236 per cent rise in prices, Mittal added.

Silver has also become an investment vehicle with ETFs (Exchange Traded Funds).

Analysts, however, cautioned that silver prices might undergo a 10-15 per cent correction in the short-run. Nevertheless, they are optimistic that it will touch a level of Rs 70,000 per kg in the next 4-5 years on ever-increasing demand from industry and investors.