Silver to Get Out of Slumber and Lead the Precious Metals Rally Amidst COVID-19?

Gold and the Asian countries especially India, seem to have a love affair, the yellow metal has long been charmed by the subcontinent people. Its close ally, silver which majorly derives its economic value from the industrial application as compared to Gold which is widely used for investment by both the individual and the institutional investors. Despite its industrial applications, Silver does not seem a bad option for investment among the commodities, but Gold has easily in the past, outshined the lustrous white metal.

Silver is trading at US$15.03 an ounce as of 9 April 2020 at 12:59 PM AEST, recovering from US$11.98 an ounce in mid-March, which is the lowest level since 2009.

Source: Refinitiv Eikon

Gold Vs Silver: Which precious metal outshines the other?

Gold has easily outshined Silver during the past few years, riding on the global uncertainties until recently and now with the coronavirus outbreak globally. The XAG/XAU or Silver to Gold ratio reached a multiyear low level in mid-March and since has been recovering. The lower value of the ratio suggests that Silver is easily being outperformed by Gold, majorly due to the sharp increase in the gold price and the decline in the Silver price.

As the Gold price trades in the record range, the individual or consumer demand for gold is expected to further decline. In fact, the recent trends suggest that people in order to benefit from the record high prices of gold are instead selling off their gold assets which is responsible for the record recycle rate in the gold.

We understand that in 2020, when the world is anticipated to strive for recovery from the economic effects of the Coronavirus for the larger portion of the year, the investors would now turn to other precious metals as the value proposition for gold is restricted.

Will Silver be the next Strategic asset for India and China?

The global gold demand dipped by 1% in 2019, the consumer demand led to a sharp decline as the prices rose over the year. With the surge in the prices, the jewellery demand for gold dipped to the lowest volumes since 2011.

In fact, the demand from India declined by almost 9% along with the greater China which includes China,

Global Gold Demand Drivers (Data in Metric tonnes) Source: World Gold Council

Global Gold Demand Drivers (Data in Metric tonnes) Source: World Gold Council

India is responsible for about one-fifth of the silver demand, utilising the metal for Jewellery and Industrial purposes. The high prices of gold have dampened the demand in Indian for jewellery, instead, the lower silver price may draw higher demand for Silver for jewellery and investment purposes. However, silver cannot replace Gold as a safe haven in times unfavourable for conventional investment assets including equities.

Silver 2020 outlook: The Way Forward for the Precious Metal

As per the Silver institute, the year 2020 would be favourable for the precious metals including Silver on strong support from the macroeconomic, geopolitical and the global pandemic conditions. This would encourage the investors to remain as net buyers of silver, splurging the silver prices. Also, continued growth in the physical silver can be expected during the year. The onset of the coronavirus outbreak might affect the industrial demand for the metal.

Once the coronavirus pandemic slows down, a spike in the silver industrial offtakes can be anticipated, which accounts for almost 50% of the total demand. China, the initial epicentre of the COVID-19 is on the recovery, with the majority of the industry and shopping complexes now opening up. This would lead to higher industrial output from china in times when the majority of the global economies suffers. The increase in industrial activity may provide the much-required support to the demand coming from solar photovoltaics and consumer electronics. A sharp recovery in demand can be expected on the revival of the global economies from the period of quarantine and travel ban.

Silver as an investment: The Silver ETF holdings are anticipated to grow stronger with the rise in the gold prices, limiting the investment potential for smaller investors. These holdings may excite the stable flow of money into the silver ETF, supporting the environment for long term retail investors. The continued macroeconomic and global uncertainties may further fuel the prices of the safe-haven assets, encouraging new allocations to the silver ETFs. As per our analysis gold seems to be in vogue in the short-term, but the other precious metal silver, on relative basis could be seen attractive by many investors who are looking at longer time horizons.

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Silver Strengthen on the backs of the Containment Measures working Globally

Silver continued to strengthen as the containment measures seem to be effective, slowing the virus pandemic. A strong rally has been anticipated in the precious metals, especially gold, platinum and palladium.

As of 9 April 2020, at 1:47 PM, the global pandemic now has over 1,484,811 confirmed cases worldwide with over 88,538 deaths. The United States has now become the epicentre of the pandemic with over 432,132 confirmed cases of coronavirus, with New York City hit the worst with over 81,803 cases and counting. The upcoming week is considered crucial for the country with the death counts registering a spike. In fact, the US Surgeon General Jerome Adams called this week to be the toughest moments for many Americans of their whole lives. The US administration anticipates a total of up to 240,000 US deaths from the pandemic.

During the early stage of the Coronavirus crisis, the US Dollar and US Treasures were considered as the safe-haven assets, but with the recent weakness observed in the US Dollar indicates otherwise. This would draw investment towards the precious metals market, especially, Gold and Silver. Any further weakness in the US Dollar or equity market will reinforce the investor’s confidence in the precious metals market.

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