Like other industrial commodities, silver prices are significantly impacted by supply and demand. It has thousands of industrial applications because it is the best conductor of electricity. And - unlike gold - it actually gets consumed; by some estimates over 90 per cent of the silver ever mined has been used up and will not be recoverable. There has also been a steady rise in demand for silver over the years. Its price is also more volatile than gold, which makes it a trader's favourite as compared to investors who prefer gold. Over very long periods, silver prices do track gold. But silver uniquely provides the twin characteristics of both industrial metals (based on demand and supply) and bullion (as a financial asset and a store of value).
Annual silver investments have risen seven times over the last decade and industrial demand for silver continues to increase. We expect record requirement this year, which on it own would have pushed up prices but for the recent strength of the US dollar against a basket of major currencies, which also plays a major role in pricing silver because it is denominated in US dollars. That apart, demand for silver continues to come in from industries and is expected to grow sharply due to its applications in health and medicine, electronics, communication, solar power, batteries and computers.
While investor demand for silver is clearly visible, there are immediate issues from a price perspective with oversupply in the range of 4,000 tonnes in 2013 because of curtailed industrial demand in a slowing global economy. India is the world's largest importer of silver consuming about 4,000 tonnes annually, the largest part of which goes into making jewellery. In industrial use too, India is a big consumer and ranks third worldwide. India's economic revival will have a bearing on demand for silver as well as prices over the next couple of years.
But the current price outlook is weak and prices fell over 14 per cent last month at the Comex, triggered mainly by gold's worst two-day drop in three decades. This has sent the gold/silver ratio to its highest level since September 2010 with an ounce of gold currently buying 61 ounces of silver; this means silver is currently cheaper compared to gold than it has been for a long time, making it relatively more attractive. However, the sudden fall in silver prices last month is too recent to decide whether it is the end of the bull-run or a short correction.
Technically, this is a corrective wave of the virtually one-sided rally from Rs 15,782 per kg to Rs 73,600 per kg at MCX but this fall has breached even the strong support of Rs 45,800 per kg. Below the psychological mark of Rs 40,000, the next support is at Rs 37,500. In dollar terms it has plunged around 60 per cent from the April 2011 high of 49.83 per oz at the Comex to its recent low of $20.4 per oz; the next strong support is at $17. The current pull-back rally too will find strong resistance at Rs 48,000 and Rs 51,000. The current trend is down but if the fall continues - which is likely - it will soon become a bargain hunter's paradise.
But if you are a long-term investor, don't try to time the markets; periodic and systematic investments remain the best way to invest in any asset. And when providing for bullion in asset allocation, keep it at about 15 per cent of your total investible surplus.
The author is president - retail distribution, Religare Securities Limited
