Fundamentals show the bull run has just started in silver and investors should keep patient to reap multi-fold gain in this precious metal.
It has been a good year for precious metals, particularly for gold and silver. If we look at gold, it has performed 28 per cent while silver has outshined gold and gained by nearly 40 per cent year to date. Investors have flocked to the metal in recent months, with hedge funds expanding their bullish bets on silver to an all-time high in May, as reported by Bloomberg. Silver demand appears to be increasing and supply appears to be decreasing. Another reason for gain in silver prices is continued low-rate stimulus by the Federal Reserve, European Central Bank (ECB) and Bank of Japan. Negative rates by ECB and Bank of Japan have supported expectation for continued monetary easing which is positive for bullion.
According to data compiled by GFMS for the Washington-based Silver Institute, about half of global silver consumption last year was related to the metal’s industrial use, including smart phones, flat-screen TVs, solar panels and alloys and solders. In a report from Bloomberg it stated that industrial demand is set to increase, driven by rising incomes and growing penetration of technology in populous, developing nations. New uses are being found for silver’s anti-bacterial and reflective properties in everything from hospital paints to Band-Aids to windows. Now every phone, light switch, screen etc contains silver. Not just industrial use but demand for physical silver for investment is also on rise. Last year, with prices of silver at low, there was overwhelming demand for US silver mint coins. India and China alone would need approximately more than billion smartphones by 2020. This will surely keep the demand for silver buoyant. With increasing pollution from coal plants, world is starting focus on solar power. The solar industry is likely to consume more than 15 per cent of the total silver demand this year.
Silver mine production is expected to drop. If we look at mining production this year, it has dropped by 5 per cent. Bloomberg reports that Societe Generale expects silver supply to decrease 9.2 per cent in 2016 from 2015 mainly due to cutbacks in base metals production. Silver is a limited commodity. Its usage is increasing day by day. The Gold/Silver ratio has dropped to 67.5. It means one ounce of gold is worth 67.5 ounce of silver. The ratio was 78 at the start of the year. This suggests that silver has outperformed gold from the start of the year as on average the gold/silver ratio was around 51-55.
In MCX, after such a phenomenon run in silver, we saw silver correcting in August month. Short term, silver is expected to correct further till Rs 43,600 per kg. On daily chart, it failed to make new high which indicates profit booking and lack of buying. It has broken its short term support of Rs 45,500 per kg and so now next support comes at Rs 43,600 per kg. For short term traders, we recommend not to create long position as long as it is trading below Rs 45,500 per kg. Momentum is on short side so be short with stoploss of Rs 45,500 and keep target of Rs 43,600 per kg. However those investors who are looking for long term, the fundamentals show the bull run has just started in silver and they should keep patient to reap multi-fold gain in this precious metal.
(The author is director at Tradebulls)