Silver may beat gold to better returns

 

MUMBAI (Commodity Online): At a time when gold prices are scaling new heights everyday it may sound unwise to talk about silver. But the fact is that silver has the potential to beat gold in the race to better returns.

Silver’s demand, supply and prices each have two independent dynamics at work. The dichotomy and influence of these strands on each other makes this market no place for old men, says an analysis appeared in Economic Times.

The world gets silver from silver mines, and what governments and people sell. In 2008, supply crossed 28,500 tonnes. Silver mines accelerate production when prices are attractive. People and governments too sell their family silver when prices are attractive. When prices plummeted after the financial crisis last year, scrap sales plummeted too. But the world also gets a huge quantity of silver as a by-product of lead, zinc, copper and gold mines.

As these mines are focused on the price of their primary metal, they continue to produce silver irrespective of its price signals. Put together, you can never bet silver supply will directly respond to price, says the ET.

There is a similar dichotomy at work in demand as well. On the one hand, silver is bought as a precious metal to hedge against inflation, currency fluctuations and general economic malaise. So whenever there is fear and panic in the market, people gravitate towards silver. On the other hand, silver is simply another raw material used by factories in making everything from camera films to jewellery, electronics, batteries, hi-tech clothing and radio frequency tags.

Actually half the silver sold is consumed like this. When factories slow down, as they did in the last one year, silver’s demand drops too. So demand for silver is a see-saw between its avatar as a precious metal and its day job as an industrial metal. The global recession which wrote off silver’s industrial consumption also re-ignited its bullion demand, the ET said.

How money flows into silver is an equally motley mix. Investors — these could be households, wealthy individuals, exchange traded funds and institutions — believe silver is a store of value and buy it in the form of paper, coins and bars. Ignoring silver’s physical demand-supply fundamentals, they trade in silver the way they would gold and closely track the price relationship between the two.

A few far-sighted investors are not bothered about the gold-silver connection. Instead, they are putting their faith in silver’s physical demand-supply fundamentals. Though demand for silver to make photography films has sharply dropped in the age of digital cameras, these investors believe supply would not keep pace with total industrial demand in the coming years. While a lot of above-ground silver would continue to re-enter the production cycle each year, investors are hopeful the world will find new commercial uses to suck it out too.

The punters, however, believe silver is simply a shorter route to profit than gold. They speculate on short term price movements on commodity exchanges and use both long and short instruments to gain exposure to silver price. Punters know that in terms of value, the physical gold market is much bigger than silver. Being smaller makes the silver market less liquid and more susceptible to volatility. In short, it is perfect for getting over-the-top money if you have the courage to bet on it. The combined motives and trading strategies of investors and speculators keep the silver market full of frenetic activity.

That means one could put one’s faith in silver as a precious metal and hope its value will rise in line with gold. Or one could see it as just another metal that sometimes even moves in tandem with copper and is currently plagued by lacklustre physical consumption. One thing is certain. Both ways will bring you plenty of edge-of-the-seat excitement.

(Source: Economic Times).