Silver Winds to Follow The Gold Rush Ahead?

  • Mar 01, 2020 AEDT
  • Team Kalkine
Silver Winds to Follow The Gold Rush Ahead?

The XAU/XAG or gold-to-silver ratio has reached a multiyear high in the wake of a consistent rally in the gold price, which further suggests that silver is finding it tough to match the performance of gold.

Gold Vs Silver: Who Shinned Brighter?

The ratio is now moving towards its all-time high value of 102.47 (high in January 1991), and if reached its previous peak it would suggest a more than ever expensive gold as compared to per ounce of silver. Silver is a commodity which derives its value more from industrial applications as compared to gold, which usually determines a large portion of its move from investment case or purchase by Central Banks and Gold-backed ETFs.

While over the last one year, gold has delivered a total return of 24.54 per cent, silver has performed relatively weak to deliver a total return of just 10.92 per cent.

Not just recently, silver has a track record of underperforming gold since long term with gold delivering 3,988.76 per cent of total return over the long-term, while silver delivering just a total return of 198.45 per cent with a peak return of ~ 750 per cent around 2010- 2011. 

Is Silver a Bad Investment?

Despite its weaker performance as compared to gold over the long-term, the lustrous white metal is one of the top-performing industrial metal with a return more than the highest consumable metal across the globe, i.e., copper.

Thus, once compared to the industrial metals, silver does not seem to be as a bad investment; however, as compared to gold, which contains both industrial application and demand as a safe haven against fall across risky assets, the shine in silver could be less bright.

Time to time silver has outperformed gold over the shorter time frame, which makes silver an attractive asset, and a metal with a high potential to match the performance of its peer group of precious metals and base metals.

To Know More, Do Read: Silver To Outperform Gold Ahead?

The precious metals markets are currently fixated on the escalating geopolitical tensions, especially across the Middle East, the impact of the coronavirus outbreak, and specifically how this may affect economic growth, not just in China, but also globally. The potential damage from the lower industrial activity in China has led to a flight to safety, to the benefit or gold and more recently silver. This reflects wider investor interest in the impact of GDP and industrial production prints on the silver market. That link, however, can break down as other macroeconomic variables can lead investors to react to news of weak GDP growth as pro-gold and by extension pro-silver. However, poor news on the global economy growth front could at other times be taken as harmful for the industrial metals and therefore silver too.

  • Industrial Silver Demand to Inch up 3 Per Cent- Says The Silver Institute

The industrial silver offtake, which accounted for more than 50 per cent of the total silver demand in 2019, is expected by the Silver Institute to resume in 2020; however, weak economic conditions, particularly in China, remain a major challenge to the industrial output.

The Silver Institute projects a 3 per cent increase in silver industrial demand, which remains in line with the global GDP growth forecast of 3.3 per cent from the International Monetary Fund.

The electrical and electronics sector is expected to account for the bulk of demand as silver use in the automotive industry is anticipated to foresee impressive growth despite weaker car sales in 2019 in the wake of electrification across the automotive industry.

The higher penetration of 5G-infrastructure is also likely to fuel the demand ahead along with the higher installation and penetration of photovoltaic cell. The ongoing support from the government across the globe to promote renewable energy in order to tackle climate change could also boost the demand going forward.

Also Read: The Future of Energy Generation in Australia; Solar to Increase Three-Fold By 2024

The Silver Institute expects the silver demand for jewellery to remain modest ahead, and from a country standpoint, the market is dominated by India, the US and Germany, with a combined market share in 2018 of 80 per cent. The demand for physical silver is also expected to remain robust across the United States.

Silver, along with gold, has traditionally been a preferred investment asset for a large section of the Indian population. Given a low penetration of banking and other financial products, individuals, especially in rural areas, preferred to direct a portion of their savings towards silver. Not surprisingly, silver’s physical investment demand has trended higher over the years. Indian silver bar and coin demand increased from 25.7Moz (800t) in 2010 to a noteworthy 54.0Moz (1,680t) in 2018.

The Institute also projects an elevated ETPs in 2020, while the physical investment in coins and bars are forecasted to increase by 7 per cent in 2020, reflecting the third consecutive year of growth.

Silver Demand and Supply Figures (Source: The Silver Institute)

While the projections for the demand looks good, the supply is highly expected to meet the demand with around 15 million ounces of surplus, albeit, there are certain risk factor associated with the supply side, which if unfolds, could balance the supply with demand; and,

  • At the start 2019, many large producers forecasted higher output, which followed three years of losses, had the potential to deliver a return to growth for silver mine supply; however,
  • The community unrest across South America, a cordon at Peñasquito and grades below expectation at the Uchucchacua, Fresnillo and Saucito mines have weighed on the total global production.

The above-mentioned reasons for the decline in global production in 2019 are yet to mitigate completely, and investors should monitor them closely to reckon the demand and supply scenario.

The Silver Institute anticipates the price to average around USD 18.40 per ounce in 2020, up by 13 per cent against the previous corresponding period.

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