Commentary. Silver to profit from rise in gold rates

Silver is set to benefit from the anticipated rise in gold prices during 2019. Despite being a precious — and industrial — metal, silver usually latches on to the coattails of gold and moves in tandem. The coming months will be no exception when healthy gains are expected for both the metals.

Last year, silver moved largely in line with its more precious counterpart, yet under-performed compared to the latter, especially in the second half of the year. While the yellow metal declined by five per cent, silver dropped by a hefty 10 per cent during the year. The gold/silver ratio climbed to multi-year highs in the last quarter of 2018.

Impacting factors

A strong dollar and robust equity markets capped the upside for the precious metal. Escalating trade tensions between the US and China, which impacted the industrial metals market, weighed on silver.

In addition, while the silver market was in clear surplus last year, investment demand growth was largely muted.

Without a doubt, 2019 will also witness a silver surplus again, but the positive movements in gold prices — given its safe haven status — are sure to spillover and benefit the sister metal.

Wobbly equity markets, a pause in the US Federal rate-hike cycle, resultant weakening of the dollar, and continuing global economic uncertainties such as trade tensions (despite a temporary 90 day truce) are set to combine to propel bullion market higher.

Central bank purchases could be another factor to push gold higher (China recently bought about 10 tonnes), which in turn will help silver, given the lower liquidity in the latter’s market. To be sure, the value of silver demand is just about 10 per cent of gold. If anything, the market has taken cognizance of the emerging situation.

The metal has had a great start in the new year. Silver prices were $15.58 an ounce on January 11, rising from $14.53 per ounce a month earlier.

Investment inflows are sure to amplify the price effect. In other words, silver is set to break out of its recent run of under-performance, and outdo gold in the months ahead.

Demand in industry

Industrial demand for silver represents a little over 50 per cent of its annual consumption demand.

For the last four years, such demand has been rising. China will continue to be the world’s largest consumer of silver industrial products.

Meanwhile, the demand for silver in wearable technologies is set to increase. While silver-photovoltaic demand remains historically high, the use of silver-zinc batteries in items such as hearing aids, noise-masking ear buds, and similar products is also increasing rapidly. According to technical experts, silver-zinc batteries are a preferred source for the growing number of electronic devices that require smaller, safer, and more energy-dense solutions.

The electric-vehicles revolution will also boost demand for silver, as experts develop fast-charging new battery materials.

Yet, global headwinds — in the form of slowing economic growth — and thereby industrial production and in turn industrial metals prices cannot be ignored. There is belief that the trade war is unlikely to derail silver’s upside price prospect.

This strengthens the potential for silver to touch $17 per ounce this year.

The writer is a policy commentator and commodities market specialist. Views are personal

COMMENT NOW