Silver is used in many different sectors, including manufacturing, technology, jewellery, and tableware. It’s a good bet to place, when worry over the economy is rampant, due to a disappointing jobs report in May, confusion from the Fed, and concern over the Brexit vote taking the United Kingdom out of the EU. Investors are flocking toward things with more value than paper currency, and one of those things is silver.
With precious metals prices soaring this week, month, and year on the back of flailing Fed credibility, it is not entirely surprising that assets in exchange-traded funds backed by silver have swelled as investors seek a haven from global economic and political risk. In fact, as of today, Silver ETF holdings have never been higher. It appears that the demand for physical holdings in the ETFs has accelerated notably faster than the price has been allowed to rise.
The price of silver has been subjected to considerable manipulation over the years. One startling fact concerning the price of silver is that the actual market is far larger than the actual supply of physical silver. The total silver market including silver contracts, derivatives and other financial products comes to around $5 trillion or 250 times the amount of physical silver available, giving paper silver to physical silver ratio of 250:1. Nevertheless, no matter which way we look at it the volume of paper silver to physical silver is tremendous and this is one of the reason that silver prices remain artificially suppressed and highly volatile.
Gold: Silver ratio is currently at 73.3. It means one ounce of gold can buy 73.3 ounces of silver. This has come down from a high of 83.8 ounces at the end of February, which was a level last seen during the 2008 financial crisis. Historically, in last 40 years the ratio has averaged 61 ounces of silver to one ounce of gold, while for the last 100 years it has averaged 55 ounces.
In MCX, any follow up buying or selling will come after Jun 23rd Brexit. If Britain decides to stay in EU, then we may see bullions like Gold and Silver sell off as their recent up move was because of uncertainty regarding Brexit. Right now, Rs 40,650 per kg is the crucial support for Silver. Long term trend is bullish and any investors looking for long term investment should start accumulating Silver around levels of Rs 39,000-38,000. All the oscillators are also pointing upwards indicating bullish trend in Silver. If Britain stays, then silver may crash up to Rs 40,200-39,800. We still think Silver is ideal candidate for buy on dips.
Silver was essentially forgotten by much of the investment community for a long time, thereby creating a great value opportunity. Silver is often put to the wayside in favor of its more valuable cousin, gold. For the average investor, gold is a pricey, sometimes impossible investment, currently priced at almost Rs. 30500/10 gm. Valued at Rs. 41600/Kg. Silver is an investment that the average investor can make, by buying into silver bullion and silver stocks.
We believe that it is significantly underpriced and its current price does not reflect its true value based upon supply and demand alone, which means that over the long-term it will appreciate in value. It will be however be a bumpy ride for investors, with the large volume of paper silver along with further potential manipulation increasing the volatility of silver. But for now, Silver is bought on dips. Any correction is an opportunity to buy.
(The author is director at Tradebulls)