Silver will trade even lower

Silver’s value as a precious metal has long been considered second only to gold.

However, the grey metal has been losing its significance as an asset class in investor’s portfolio this year. Although, silver and gold move in tandem, silver has lost its value by 11.5 per cent till date this year in contrast to a 2.7 per cent gain in gold.

On the MCX, silver has lost some 12.5 per cent of its value for the same time frame. Prime reason for the fall being the dollar index which is hovering at a four-year peak around (85 mark) as the US economy gains traction.

The US economy has been the prime source for any reaction in the precious metals prices and the economic optimism is evident from the Fed’s confidence that labour market and housing market (the two biggest sectors in the US) is gaining traction. Rising equities in the US coupled with the rising consumer confidence is also denting the appeal for the grey metal.

Besides, the PMI numbers from the US since the start of the year has been on the rise as indicated in the graph alongside. Since commodities and dollar index share an inverse relation, the good economic data has led to the strength in the dollar index in the past one year as the. The index has gained by around 6.5 per cent in turn pressure on commodities including silver.

Although, the US economy has been a good performer in the past one year, troubled euro zone is an area of concern as industrial activity has lost momentum in turn lessening demand for silver in all the industrial applications. This time it is Germany, the largest economy in the Euro-zone. German economy is expected to grow at a pace of 1.2 per cent this year and slow down to 1.2 per cent next year. There are talks that the economy will slip in to recession in coming months.

Besides, the International Monetary Fund, in its October edition of the World Economic Outlook (WEO), has said that if economic activity falters in the euro zone, it will be a key issue for the global economy. On the other side, minutes of the US Federal Open Market Committee September 16-17 meeting, released on October 8, showed that members were concerned about slowing growth in the global economy, including the euro area, as it could lead to further appreciation in the dollar exerting downside pressure on silver prices.

For the next three months, we expect silver prices to trade lower on upbeat economic data from US which will lead to strength in dollar. Ease of geo-political tensions between Russia and Ukraine will further drag prices.

Besides, waning interest by fund managers, decline in investment as well as physical demand is indicating that silver has lost its significance as a portfolio diversifier. Silver prices will correct further in the coming months as fund managers reshuffle their portfolios as a part of rebalancing strategy.

In addition, Fed’s scaling of monetary stimulus in the months ahead in reaction to the signs of growth in the US economy and possible end of QE3 coupled with rise in the federal funds rate by mid 2015 can act as a negative factor for silver prices.

With the price trend estimated to be negative, it is expected that MCX silver prices (Current Market Price : ₹38,590a kg ) for the next two months can correct lower towards ₹37,000 on the MCX. In dollar terms, spot silver (CMP: $17.34/oz) prices are likely to trend downwards towards $16 in the international markets.

The writer is Associate Director-Commodities & Currencies, Angel Commodity Broking. Views are personal.

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