Silver prices expected to gain strength

Silver, known for its price volatility, stung many investors with a drop of 33 per cent over six sessions in early May from a record of $49.51 an ounce set April 28. But silver continues to lead precious metals, with a gain of 24 percent so far this year, outstripping gold's increase of 11 per cent, and retains allure for inflation-wary investors.

Silver prices have held at more than $32 since mid-May, and analysts expect silver to move higher in the second half of the year, supported by low interest rates in the US, a sovereign debt crisis in the euro zone and inflation concerns in major emerging economies like China and India.

“Lingering fears of a sovereign debt crisis, inflationary pressures and a slowdown in the recovery continue to drive investors to look for a safe haven and hedge against uncertainty,” said Phillip Futures analyst Ong Yi Ling. “When gold hits a record high, investors will once again search for a cheaper alternative to gold, and silver may be the best candidate.''

Recently, the spot price of gold extended gains to a ninth session, reaching a record of $1,589.56 an ounce, while silver extended a rise of 5.6 per cent from the previous session to $38.38. Phillip Futures said it expected silver prices to reach $43 in the second half of the year, while Barclays Capital said it expected prices to reach $40.20 in the third quarter.

“Silver is looking reasonably good in the second half, as prices have been basing around $35, and is not losing momentum any more,” said Australia & New Zealand Banking global head (commodity research) Mark Pervan.

Trading volumes for silver on the Shanghai Gold Exchange rose May 13 to 2.26 million kilograms. While volumes plunged to 4,75,056 kilograms, that was still more than three times the average daily volume of 1,51,966 kilograms last year.

The silver story is expected to be underlined by a continued preference in Asia for the physical metal and rising demand for exchange-traded funds, analysts and traders said. The outflow from silver-backed exchange-traded funds is also likely to be coming to an end, and the possibility of rising demand from those funds will further bolster silver prices in years to come, Pervan said. The funds let investors profit from rising prices without owning physical material and have become popular among Western investors. The growth of such funds has helped gold prices take off, as the increasing holdings add to the demand for bullion.

“The ETF story that has driven gold in the past four or five years is a new dynamic in silver,” Pervan said. “Further build-up in silver ETF demand may be slightly more than what you’ ll see in gold, a lot of which is driven by a lower entry point to precious metals provided by silver. It’s 1/40 of gold’s price, which is always going to be a trigger for small investors.” The gold-silver ratio, or the number of ounces of silver needed to buy one ounce of gold, has dropped to a one-month low of 41.4, off its lows of under 32 in late April when silver prices were at a record high.

The silver held by IShares Silver Trust, the world’s largest silver exchange-traded fund, rose 1 per cent to 9,633.95 tons Wednesday, 15 times the fund's holdings at inception in April 2006. The world's biggest gold exchange-traded fund, SPDR Gold Trust, reported holdings at 1,225.41 tonnes, 151 times its holdings when the fund was started in 2004.
It would rank among the largest gold holders in the world, right after France and before China. Silver prices in the second half are expected to hinge on a pickup in demand from India, the world's largest bullion consumer and one of the largest silver consumers in terms of fabrication demand.

A number of gold funds have attracted increasing interest from investors in India this year, but silver funds have yet to start trading there because of regulatory uncertainties. Retail investors in India rushed to buy silver bars and coins during the metal’s price rise early this year, only to rue their luck when the May rout shaved a third off the metal’s value. But dealers say good monsoon rains and bulging farm incomes could bring back buyers.

“If farmers get good crops, certainly demand would rise from rural households,” said Harshad Ajmera, who owns of JJ Gold House, a wholesaler in Kolkata. The monsoon has so far been normal, which bodes well for rural earnings. But silver imports are likely to slow at least for the next month or two, coinciding with Indian monsoon season, which typically sees a lull in purchases of gold, and silver as farmers focus on sowing crops. Rural areas make up 70 per cent of India’s gold demand and about 60 per cent of its silver consumption.

“I usually buy gold and silver jewelry at the time of the Diwali festival,” said Vikram Patil, a cotton farmer from Jalgaon, Maharashtra. “If my earnings improve, I will invest more in jewelry,” Patil added.