The ongoing debate in the global precious metals market is not so much about gold market outlook as about silver. Economic growth, geopolitics, monetary policy and currency factors are set to impact the market outlook in the coming months.

The flow of speculative capital, which usually exerts an exaggerated impact on prices, will depend on the behaviour of the major drivers.

No wonder, divergent views over the likely trajectory of silver prices in 2018 have emerged; all the views on the upside potential and downside risk are equally forceful.

Apart from being in the precious metals complex, silver also has plethora of application as an industrial metal with the sector consuming 50 per cent of the total production. So, when prices of industrial metals rise, silver tends to gain.

Mixed outlook

Many bankers see upside price possibilities emanating from geopolitical tensions that will fuel haven demand. At the same time, positive growth signals, a firming dollar and strong US Fed rate hike expectations cap the upside for silver prices. The consensus price has veered around $17.5 an ounce annual average for 2018, with maximum at $19.4 and minimum at $15.8.

While it is common knowledge that silver usually latches on to the coattails of gold, silver’s price performance is often more volatile than gold’s. Price movements in the base metals complex too impact silver. Last year, the white metal underperformed gold with the latter gaining 12 per cent as compared with 4 per cent by the former. Also, silver did not benefit much from improvements in many base metals.

So, will silver continue to underperform gold this year? According to Capital Economics, despite a rally in gold and base metals prices, silver has had only a modest performance in 2017 and it is believed that silver will continue to underperform gold in 2018. It is argued that the reduced haven demand has undermined silver as investors tend to favour gold when geopolitical risks are high.

While gold has proved to be a good hedge, silver has behaved more like a contrarian indicator, the agency pointed out, adding that it expects this trend to continue in 2018, which has generated a bearish view on silver prices.

But Metals Focus has a different view. It believes silver will outperform gold this year. According to the agency, the forecast rise in gold price this year is expected to deliver positive spillover effects for silver. Further, silver’s smaller and less liquid market coupled with a modest recovery in investment should see the metal outperform gold in 2018. However, the significant market surplus in the white metal could act as a headwind. End-2018 forecast is $15/oz for silver and $1,200/oz for gold.

Indian imports up

At home, bullion silver imports spurted by 90 per cent to an estimated 5,750 tonnes in 2017, making it the third highest this decade. In 2015, India’s imports were a record 7,570 tonnes. In 2018, imports rose modestly, said Metals Focus in a recent report.

From now on, attention will be on the upcoming Budget and the likely impact it would have on the Indian economy, in general, and on the bullion sector, in particular. Any change in the rate of Customs duty would be one thing to watch out for although on current reckoning, the prospect of a reduction is bleak. Rupee’s movements in the months ahead will also be crucial. If there is any directional change, it should be to the downside for the rupee.

The author is a commodities market specialist. Views are personal.

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