The Hindu Business Line : ‘Silver may outperform gold this year’

Trends and figures
While gold may witness a rise of 17 per cent this year, silver may post an increase of 27 per cent.
Over the last 7 years, gold and silver grew at a CAGR of 14.41% and 17.34% respectively.

Our Bureau

Chennai, Jan. 2 Silver is likely to outperform gold this year in line with the long-term declining trend of gold-silver ratio. This could mean that gold may witness a 17 per cent rise this year, whereas silver could increase by 27 per cent, according to Kotak Commodity Services Ltd (KCSL).

“We forecast an average gold price of $814 an ounce in 2008; while silver is more likely to average $17 an ounce,” said KCSL in a report.

On Wednesday, gold was up in Asian trade by $5 at $838.70 an ounce, while silver was up six cents at $14.85 an ounce. Last year, gold averaged $695.39, while silver was at $13.38.

Stating that gold and silver were asset class, it said these two metals had generated a compounded annual growth rate of 14.41 per cent and 17.34 per cent respectively in the last seven years. “This again highlights silver’s out-performance, which we believe would continue in the years to come, given the size and depth of the market,” the report, prepared by Mr Si. Kannan said.

Dollar impact

This year, gold poses the downside risk and any upside surprise in the dollar would cap its rise. “Precisely for this, we are cautious,” the report said, adding that the strategy should be commodity-specific. “Gold and silver should find a place in asset allocation. And for the traders, the strategy should be to time the market, while investors should accumulate these metals on any dips and correction,” it said.

Though gold may be in the midst of a “mega bull run”, KCSL said it believed it was time to take a cautious view on the metal. “The market sentiment is truly mixed and we believe 2008 would be a tug of war between gold bulls and bears, making forecast much more difficult,” it said.

New upsides in gold

Going by the pace of rise in gold, it reflects the growing apprehension of a much deeper financial crisis on cards. “The yellow metal is like a medicine. The more people are worried about the global financial system, the more money is flowing into it, potentially opening new upsides in the months ahead,” KCSL said.

“We now see a potential upside in gold up to $900 by next year, preferably in the first half of 2008,” it said.

The gold market has three stages spanning over 12 years, with price largely determined by currency devaluation in the first four years. The next four years are dominated by global investment demand and the final stage is the speculative “mania”. “We believe, we are currently in stage two and gold has a long way to go from the current levels,” KCSL said. Fundamentals were stronger than ever with fall in mine production and hedging activities were supportive till 2010 as major hedging activities were scheduled only in 2011. “Thus, de-hedging should take prices upwards,” it said.

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