After rising phenomenally, the price of silver has now taken a beating, prompting retail investors to sell their stock of the metal. But analysts say the drop in silver prices is temporary and would pick up once signals of industrial recovery starts coming in from the US and Europe and the price of gold stabilises.
A recent technical analysis by Citi Global Markets says silver prices may reach $100 an ounce if the current bull market follows patterns seen between 1971 and 1980. ?While the high so far this year was at the same level as the peak in January 1980, we are not convinced that the long-term trend is over yet,? the report said.
Last year silver had given a return of 83% and outperformed gold. The crisis in West Asia, rising oil prices and uncertainty in the Europe had pushed up the prices of silver from $14.80 per troy ounce on December 31, 2007, to $50 per ounce till May this year and has now come down in the range of $32-36 per ounce.
As the equities market are seeing a lot of volatility, silver has given a return of around 14% this year till date compared with just 2% in gold and a negative 10% from the 30-share benchmark index, the Sensex, indicating investors’ preference for silver will remain strong this year too.
Analysts say with gold becoming costlier investors are considering silver as an alternative investment and global foreign commodity funds are moving money into it. Moreover, with the rebound in industrial activity, the industrial demand for silver will grow and push up silver prices in the near term.
Traditionally, gold always had a positive correlation with oil but the current commodities bull markets has pushed up silver prices and has made a stronger positive correlation with oil. But analysts say that the silver market is not as liquid as the gold market and any correction in silver prices will erode investors’ wealth faster.
A recent report on the future of silver’s industrial demand by Silver Institute says from an estimated volume of 587.4 million ounces in 2010, global demand for the white metal is expected to go up to 665.9 million ounces by 2015 and the robust increase in the manufacturing of electrical contacts will drive the demand for silver. The report underlines that the use of electrical contacts in cars has risen rapidly, not simply in response to an increase in the volume of vehicles made but also because the number of end-users for contacts has expanded. The list of core users has grown considerably, from controlling windshield wipers and seat adjustments and managing navigation systems.
Projecting a bullish demand for the metal, the report says that silver is not always the first target of cost-cutting as other cost considerations may supersede those of silver, which often forms a relatively small share of the cost of the final product. It also underlines that silver enjoys higher demand because of its positive association generated by the jewellery and coins.
Apart from the rise in industrial demand pushing up prices, one of the other factors that drove prices of the metal was because globally the largest silver exchange-traded fund, the iShares Silver Trust, added 1,135 tonne to its holdings, its biggest increase in the last two decades. Global analysts had then said that this could leave the metal vulnerable to a correction if large quantities of metal are returned to the market.
In the long term, the Silver Institute says the silver prices will continue to respond to what will be a less supportive investment climate. Part of the the shortfall, created by weaker investment offtake, the report says, will be absorbed by continued growth in world fabrication demand and average prices are expected to exceed 2009 levels. That will indeed by a good investment opportunity for retail investors looking at the metal for a long-term portfolio.