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Silver prices explode in the month of July: Overview and Outlook

 

  • Silver prices at Spot and futures market move to multi-year highs
  • Safe haven demand amidst the Coronavirus pandemic driving gains in Bullions
  • Physical and institutional demand stay strong for the commodity

 

 

Bullion prices have been on the tear for the last few months with prices of both Gold and Silver registering strong performance in the futures and spot markets globally. Gold is just hovering near its life-highs for the past few weeks while lately trading over the $1,850 per ounce mark and flirting just shy of its September 2011 high of $1,920 per ounce. Silver also witnessed strong gains, though, had been laggard as compared to the yellow metal. Nevertheless, after consequent weeks of silver prices trading near key resistance levels at the Comex futures in the US, silver price at Comex and Spot markets in the US/UK have breached multi-year highs and now stand firmly over the $22 per ounce mark. This is the highest price for the commodity in the last 7 years, though significantly lower than its life-high near the $50 per ounce level.  

Silver along with Gold is a precious metal and considered safe haven which gains in value in terms of economic or financial crisis and usually have an inverse relationship with USD. However, silver has a unique quality and is also used as an industrial metal with over 50% of its overall demand coming from industrial and photography segment. Rather than this acting as a positive to the commodity, this quality sometimes weighs against its rise in times of economic issues as demand from industrial activities get hit, indirectly affecting the price action of the commodity. This is one of the major rationales behind silver underperforming gold wherein its underperformance has only increased over the last few years. Silver in comparison to gold, as seen through the Gold-Silver ratio has averaged near the 65-70 level, (how many ounces of silver needed to buy 1 ounce of gold); though the ratio has moved above that range over the years and touched its all-time high levels near 120 earlier this March when surprise negative action on global commodities, equities and currencies amongst others pushed the white-metal to $14 per ounce levels, while Gold traded near $1,700 per ounce mark.

Huge contraction in price of the commodity can be seen as one of the triggers for the strong performance seen in the past few months/weeks. Continuing demand from institutions as seen through the ETF investment trend for the greyish-white metal in the last few quarters, investment demand for the commodity in the physical markets amidst huge decline in prices and strong monetary stimulus announced by a number of major global central banks to support the economy against the Coronavirus pandemic pushed the commodity on the positive side during the past few weeks.

Holdings in ETP’s (Exchange Traded Products) for silver stand at record levels and have continued to rise over the past few years. As per update from ‘The Silver Institute’ investment from retail and institutional investors into silver ETP’s jumped to 925 million ounce by the end of June quarter with global investment rising by 21% on a QoQ basis. Overall investment and physical holdings of these ETP’s make over a year of mined supply for the commodity and one of the critical reasons behind the strong performance lately. Investments have continued to rise in the month of July and further touched fresh highs.       

If we look into the broader demand-supply scenario for the commodity, silver mined production is expected to fall by 5% in to under 800 million ounce for FY 2020 (Jan-Dec), anticipating lower mined output amidst closures due to the Covid-19 pandemic which has left many countries under deep lockdowns. Total supply including recycling supply is expected to be lower by 4% to 978 million ounce. Demand is also expected to decline with industrial demand for the metal (including photography) expected to drop by 7% to 505 million ounce and total demand seen lower by 3% after taking into account the strong rise in net-physical investment by over 16% to 215 million ounce for FY 2020. Investment in ETP’s is seen rising by over 50% to 120 million ounce driving the commodity into deficit scenario for the second year in a row. The numbers, as updated and expected during the April release from ‘The Silver Institute’, may see further revisions as both supply and demand are seen getting hit due to the covid-19 pandemic. Mine supply in South America and particularly Mexico which marks the largest supply for the commodity have seen extended closures due to the rising Coronavirus cases and may lead to further decline in overall production for the commodity. While industrial demand is also expected to take a hit, demand from physical and ETP investors is seen aiding strong physical consumption for the commodity from retail and institutional investors alike.

 

On another note, stimulus measures in terms of monetary support from different major central banks is seen adding more value to the financial markets inclusive of investment coming into equities and commodities alike. This is expected to provide additional support to silver market as well. However, investors are required to be highly cautious in terms of any fresh investments in the commodity both on financial and physical side as silver prices are already up over 20% in the first 3 weeks of July itself. Prices stepped up from ~$18 per ounce levels to firmly standing over $22 per ounce level as per the current trade on 22nd July. While technical analysts around the globe are going gung-ho over the strong rise in the commodity during the past month, particularly after the break of major resistance levels of near the $20 per ounce mark, the commodity is famous for its mercurial nature in terms of trade and can see wide swings on either side. From a technical perspective, $25 per ounce seems to be the critical level to watch in the short-to-medium term while major technical and psychological support would come by seen near the $20 per ounce mark. Investors can look for bullish momentum in the commodity but should be ready for wide swings in the metal as can be seen historically in the same.

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