Silver starts to sparkle
Amid all the enthusiasm around gold, we noticed some interesting sparks in Silver.
The Comex silver price has been stuck in a trading range of between USD 13.80 -21 per oz for five years now. Historically, the price touched a high of USD 49.80 per oz in 2011, after which it followed a steady downward path to hit a low of USD 13.63per oz in Dec 2015. It was, until recently, trading in a range bound market.
Over the past two months, the tide has turned for silver. Comex Silver rallied more than 11%, mainly supported by the fed interest rate cut, geopolitical tensions and a slowdown in the global economy. This and other indicators lead us to believe that silver is going to outperform in the coming months.
Demand for Silver is picking up
According to a recent Silver Institute report, India is expected to continue to be one of the largest silver consumers in 2019. Silver imports reached nearly 225 million ounces (Moz) last year, which was over 35 percent higher than in 2017.
Additionally, global silver jewellery demand is expected to record robust growth in 2019. Thailand is expected to be a driving force behind the rise. In the United States too, silver jewellery gives lower carat gold items stiff competition, especially due to female self-purchases, amongst many other factors. More importantly, the demand for silver jewellery is expected to expand the world over, due to its diversity of design, fine quality and excellent retail margins.
According to a report by the Silver Institute (April 2019), there has been an increase in total silver demand for the first time since 2015, as it has risen 4% to 1.03 billion ounces. The report also pointed to a robust recovery in retail investments, led principally by the demand for silver bars, which climbed sharply last year.
Silver Supply drops on mining disruptions
Where the supply of silver is concerned, global mine production fell 2% in 2018, experiencing its third consecutive annual decline to 855.7 Moz. These cutbacks were on account of supply disruptions in Canada, Guatemala and the United States.
Market watchers believe that for the third consecutive year, in 2019 all the silver produced will be absorbed by the various downstream sectors, within the boundaries of margin.
Large speculators contribute to the silver rally
Large precious metals speculators have turned bullish once again, increasing their net positions in the silver futures markets this week, according to the latest Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) on 3 August 2019.
The non-commercial contracts of silver futures, traded by large speculators and hedge funds, totalled a net position of 64,297 contracts according to data reported on July 30th. This was a weekly gain of 9,536 net contracts from the previous week which had a total of 54,761 net contracts.
The week’s net position was the result of the gross bullish position (longs) increasing by 1,153 contracts (to a weekly total of 111,282 contracts) while the gross bearish position (shorts) dropped by -8,383 contracts for the week (to a total of 46,985 contracts).
International Silver ETF Volumes Surged too
Since the start of July 2019, Silver ETFs have begun to see inflows of nearly 2,000 tonnes. According to estimates, this is equivalent to more than a month’s worth of mining production. In fact, Silver ETF holdings tracked by Bloomberg are at a record high of over 18,300 tons.
Nearer home, the MCX Gold to Silver ratio also suggests that silver is on a roll
The Gold to Silver ratio represents the number of units of silver required to purchase one unit of gold. This comparison helps traders to decide when to purchase one metal over the other as a lower Gold-Silver ratio indicates that silver is outperforming and a higher ratio suggests gold is doing better.
After hitting a historical high of 0.914 levels towards the end of June 2019 the ratio has fallen to 0.836 approximately and is currently taking strong support at the channel line. If it breaks below this support, it can briefly drag down towards the retracement level of 38.2% 0.81. Once it breaks below this, we expect it to drag down towards south of 0.75 levels first and then to 0.64 to 0.62 levels over the next six months to one year.
Technically, MCX Sep Silver has broken the two key resistance levels – first the trend line resistance and then the Fibonacci retracement of 50% of 41950 levels (35147 to 48932) on a daily basis. Going forward, we expect it to face immediate resistance at 61.8% retracement (43600). Once it breaks above this level, we can expect the price to march towards 45800 first for a one to three-month period and after that, to 49000–50000, over the six months to one year period.
On the RSI Front, the momentum indicator is trading above the overbought zone on a weekly basis. So, we expect a minor short term correction in the price. However, we expect it to take strong support at the trend line, which comes around 40250 levels, approximately.
Watch for the Silver lining ahead
Silver and gold are highly correlated. That is not likely to change. However, for those seeking to diversify their portfolio and others who would like to get a piece of the metals action, it certainly looks like silver’s time has finally come.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.