As silver slides, punters should exit, long-term investors should buy dip

Those investing now should stagger their investments and enter with a long-term horizon

After running up by a humongous 155.4 per cent over the past year, the price of silver has corrected by 29.2 per cent over the past three months. According to experts, short-term traders should consider booking losses and exiting silver, while long-term investors should accumulate more of the metal on dips.

Key factors behind correction

The US/Israel-Iran conflict affected crude oil supply in West Asia, and the closure of the critical Strait of Hormuz has pushed crude prices above $100. Inflation risk linked to higher oil prices has reinforced expectations of elevated interest rates. “A stronger US dollar and elevated interest rate expectations have acted as macro headwinds for silver,” says Vikram Dhawan, head commodities and fund manager, Nippon India Mutual Fund. When interest rates rise, non-yielding assets lose their appeal.

 

Another factor behind the recent correction in silver prices is the unwinding of crowded speculative positions. Profit-booking by institutional investors and exchange-traded funds (ETFs) exacerbated the fall. “Nearly 9,000 tonnes have exited derivatives markets and ETFs since the late December and mid-January peaks, showing the scale of deleveraging and profit booking,” says Dhawan.

 

Exchanges hiked futures margins amid the fall. “An increase in silver futures margin by about 40-50 per cent of the contract value led to long liquidation,” says Deveya Gaglani, senior research analyst (Commodities), Axis Securities.

 

Industrial demand may also slow down. “Weak industrial demand signals, especially from China’s slowing economy, have hurt sentiment because silver is both a precious and an industrial metal,” says Niranjan Avasthi, senior vice president, Edelweiss Mutual Fund.

Factors that could push silver lower

Silver could fall further if global growth or industrial activity slows. “Nearly two-thirds of silver consumption is linked to electronics, solar, and manufacturing,” says Dhawan.

 

If there is no deal between Iran and the US and oil remains above $100, the US Federal Reserve may be forced to hike interest rates to curb inflation. “Higher interest rates triggered by elevated crude oil prices could have a ripple effect on precious metals and lead to a sharp correction in silver prices,” says Gaglani.

 

Avasthi adds that a strong US dollar would exert pressure on commodity prices, including silver.

Factors that could stabilise or lift silver

The demand-supply situation could help stabilise the price of silver. It is one of the few frontline commodities in a long-term structural deficit. 2026 is the sixth consecutive year of deficit in the supply of silver.

 

“The silver deficit is driven by rising consumption from green technology applications while the supply response, especially from mining, has remained tepid,” says Dhawan.

 

Silver is used extensively in solar panels, industries, electric vehicles, and jewellery. “If the demand for electric vehicles rises because of high crude oil prices, silver prices may stabilise and gradually rally,” says Gaglani.

 

Peaking of interest rates and expectations of rate cuts could also revive demand for precious metals. “Any weakening of the US dollar would also support silver prices,” says Avasthi.

 

Experts say that a reversal in ETF outflows will be an important signal to watch.

Outlook for silver over 6-12 months

Silver is expected to remain volatile in the near term. ETF outflows have abated but have not yet reversed meaningfully, so near-term volatility may persist. “Prices may remain volatile if industrial demand slows or growth concerns deepen,” says Dhawan. The emerging interest rate trajectory will also cause volatility to persist in the near term.  

 

Avasthi is of the view that the downside may be limited after the sharp correction unless macro conditions worsen significantly.

 

Experts remain positive about silver’s prospects over a 12-24 month horizon because of tight physical supply and steady industrial demand. “Its medium-term outlook remains positive because it will benefit structurally from energy-transition themes,” says Avasthi. Higher crude prices will further strengthen the case for solar power, electric vehicles, and grid electrification, all of which use silver intensively.

 

Avasthi believes that if rate cuts begin and industrial demand stabilises over 6-12 months, silver could stage a gradual recovery.

What should investors do?

Some investors may have entered silver as punters, when its price was rising sharply. “Investors who entered silver from a short-term perspective may need to consider booking losses,” says Renu Maheshwari, Sebi-registered investment advisor, co-founder and principal advisor, Finscholarz Wealth Managers.

 

Long-term investors have the option of booking losses and adjusting them against other gains. They may then accumulate more silver. “They may buy during sharp corrections and average out their cost of purchase,” says Maheshwari. She suggests that long-term investors who do not treat silver as a speculative tool may allocate about 1-2 per cent of their portfolio to it.

 

Investors with no exposure to silver may buy on dips. “They should enter this precious metal with a long-term view and invest in a staggered manner over 6-12 months,” says Maheshwari. They should avoid making lump-sum investments.