Is silver losing its sheen as a safe asset?

Hareesh V

In spite of the global economic meltdown and geopolitical uncertainties that lifted the demand for safe assets, silver, the sister metal of gold was in the bearish territory since mid-March.

Historically, silver always lags behind the performance of gold price, but most recently, it was not.

The commodity has been under pressure for the past few years due to lackluster industrial demand and bearish sentiments in the entire metal complex. However, it has caught up with gold’s momentum and ended the previous year by gaining more than 20 percent.

Usually, silver prices lag behind gold but this time the commodity has not followed similar traction. Fears of global recession and increased global geopolitical instability lifted gold higher but silver is still placed at multi-month lows.

Silver’s price relative to gold also declined to record low levels. Gold-silver ratio, the amount of silver required to purchase one ounce of gold is currently placed at 113 indicating that silver is undervalued compared to gold.

Although there are numerous factors that can influence the price of silver, industrial and investment demand are the unique variables that recently affected the trend of the metal.

Almost half of the world’s silver usage is for industrial applications. Silver in the areas like electrical, electronics and automobile sectors had accounted for the bulk of gains earlier.

However, the current weak industrial off take after the coronavirus outbreak adversely has hit the demand of the commodity. Change in investor preferences and a strong dollar also lightened the demand and thus prices of the commodity.

At the same time, the Silver Institute, an industry group of silver believes that macroeconomic and geopolitical conditions will remain as a support for the metal.

The agency hopes that ongoing weak economic sentiments will encourage investors to stay net buyers of the precious white metal.

The demand for physical silver investment and the need for the commodity in industrial applications is expected to rise in 2020.

Silver usage in 5G infrastructure and upcoming intelligent electronics are likely to fuel demand. Jewelry demand may continue with modest growth with India remaining the dominant growth driver.

Holdings of Exchange Traded Funds continued to rise and are placed at record levels. It is also expected that ETF holding remains on the higher side as prevailing macroeconomic uncertainties should favor silver’s safe-haven demand.

On the supply side, mine production is expected to improve by 2 percent in the current year, the first annual increase after five years.

Several recently commissioned new mines and ramp-up of several mine expansions to full production are likely to contribute more. Scrap supply of silver is also expected to rise.

Looking ahead, global economic health would play a major role in determining the price of silver. A swift economic recovery can lead to higher industrial demand and thus the price of the commodity and vice versa. Demand from the investment side would be vital as it can offer more pace to prices.

Holdings of ETFs and the need for physical silver for investment purposes can also set a short term direction of the commodity.

Historically, during periods of economic uncertainties investors turn to gold and silver investments as a hedge against risk. Hence, there are expectations that silver can gain if global economic meltdown and geopolitical uncertainties continue.

On the price side, $20.50 an ounce can be acted as a stiff resistance and $11 an ounce could protect the downside.

(The author is Head Commodity Research at Geojit Financial Services)