Last Updated : 16 December 2010 at 11:35 IST
Silver to lead commodity bull run next year
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An extremely bright future for silver jewellery is one of several reasons to be extremely bullish about silver. To put the jewellery market into context, total jewellery demand was a little over 2,600 tonnes in 2008 (using numbers supplied by the World Gold Council and The Silver Institute).
Of this total consumption, gold jewellery comprised over 80%. Put another way, silver jewellery represented less than a fifth of total demand. The demand for gold jewellery has fallen in the last couple of years — as a response to gold rising to a new, (nominal) record-price of over $1000 an ounce (oz).
Rather as a jwellery Silver also possesses many extremely useful chemical/ metallurgical properties which have resulted in the massive consumption of silver in a variety of industrial applications. Investment will therefore have a major part to play in keeping prices at elevated levels.
This year, it has surged. The largest silver exchange-traded fund has seen inflows worth some $528 million, coin demand has risen, and speculative open interest in New York silver futures has climbed to its highest since March 2008.
Also the world’s supply of silver is being rapidly “consumed”. The evaporation of stockpiles has occurred because the vast majority of silver used “industrially” is in products where silver is used in tiny quantities. Because of this, it is impractical to recover/ recycle this silver, meaning it is effectively gone forever.
Silver prices are currently ruling at a multi-year record high of $28 per troy ounce in the US. Investment demand has been the major contributor to this rally. The subprime crisis and interest rate cuts by the US Federal Reserve spurred buying interest in silver.
The intermittent weakening of the dollar also pushed up prices. Silver is the cheapest among the currently traded precious metals, and has been party to the commodity bull run since ’04. It shares a high correlation with gold and largely moves in tandem with it, albeit in a more volatile manner.
The correlation between gold and silver prices since the beginning of ’05 till date has been 97.4%. On the supply side, mine production, sales by governments and scrap sales are the leading suppliers of silver. The principal sources of silver are ores of copper, copper-nickel, lead and lead-zinc.
The prospect of further monetary easing in major economies has favored the metal on two fronts. It rises with gold as an investment vehicle and alternative to paper currencies, while also benefiting from greater demand for industrial commodities.
This has made silver increasingly expensive compared to gold, with the number of ounces of silver needed to buy an ounce of gold slipping to its lowest in more than two years at 56.7."The gold: silver ratio shows quite a nice relationship with appetite for risk and that has clearly been improved by quantitative easing," said RBS analyst Daniel Major, pointing to renewed stability in industrial commodities and equities.
"That has a double impact on silver. You have a stronger gold price and weaker dollar as well as improved risk appetite."
If precious metals investment loses momentum, any residual support silver takes from industrial demand is likely to kick in well below current price levels.
"The marginal increase in price has come from investment, not from industry," said HSBC analyst James Steel. "Industrial demand sustained it above $15, but it did not take it over $20."
If investors continue to favour gold and silver, this is not likely to be an issue. But if gold prices do enter a period of correction, whether large or small, silver is likely to suffer an even sharper retreat.
The silver market is smaller and less liquid than that of gold, meaning price moves tend to be exaggerated. If interest in bullion investment drops off, silver's underlying fundamentals are less robust than those of other precious metals, like platinum and palladium.
As analysts point of view with many seeing a risk of correction in gold, especially if the Fed fails to make significant steps toward further quantitative easing silver is looking still more prospective .
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