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Silver – the underperformer finally performs, but will it last?

June 03
14:04 2020

Ravindra Rao

Silver had a rough start of the year 2020 as it failed to replicate the sharp rally in gold price due to concerns that economic slowdown on back of virus outbreak may dampen industrial demand.

The metal has however garnered enough interest in last few days and it has outrun gold in last few days. In the month of May, we saw spot gold price rising by about 2.5 percent while spot silver registered a staggering near 18 percent rise.

Silver’s outperformance is also evident from the gold:silver ratio. The ratio has fallen from near 113 at end of April to near 94 levels by end of May as silver has risen more than gold.

Once the underperformer has now outperformed due to support from all fronts. Gold continues to trade sideways to higher as global economies struggle to gain traction while governments continue to take stimulus measures. Increased US-China tension and protests in US and Hong Kong has also increased appeal of gold.

Silver has also benefitted from stability in industrial metals. With US and other countries easing virus related restrictions and governments providing stimulus measures, economic activity is expected to pick up which could increase demand for industrial metals. Silver which is a precious metal but has the largest usage in industrial sector rallied on hopes of demand recovery.

Robust investor interest has also helped silver prices. Silver holdings with iShares rose to a record high level of 14,513.79 tonnes on June 1. Investors have continued to put money in the metal in expectations that it might catch up with gold and move substantially higher.

While silver seems to have regained its mojo, the question is will it continue? Gold and industrial metals which are currently stable due to weakness in US dollar are unlikely to continue long in the same direction. If we see economic activity picking up and outlook improving for industrial metals, gold’s safe haven appeal may wane. On other, if global risks intensify in form of US-China tensions or second wave of infection, gold may continue its upward momentum but industrial metals may lose traction.

Global economic recovery is likely to be a long process and this indicates that silver investors are not betting on a sharp rise in industrial demand for the metal. It seems more like that silver is being seen as a cheaper alternative to gold, outlook for which remains positive.

The author is VP-Head Commodity Research at Kotak Securities.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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