Silver had a sparkling run. What comes next may not be pretty

Silver's rally has been fuelled by a parallel rise in gold and copper prices to record highs due to central bank actions and Chinese demand, respectively. (Mint)
Silver's rally has been fuelled by a parallel rise in gold and copper prices to record highs due to central bank actions and Chinese demand, respectively. (Mint)

Summary

  • The white metal has risen 26% from 73,501 a kg to a record 92,475 in the year-to-date, MCX’s spot price index shows.

MUMBAI : With silver trading at higher than 90,000 a kg on commodity bourse MCX, market stakeholders warn that any increase toward the psychological 1 lakh level could result in a profit-booking spree. The white metal has risen 26% from 73,501 a kg to a record 92,475 in the year-to-date, MCX’s spot price index shows.

“At ( ) 90,000, silver is adequately priced, and any further rise could create an imbalance in pricing," said Shekhar Bhandari, president-global transaction banking, Kotak Mahindra Bank. “There is a good chance of a 5-10% pullback, given the recent spike we have seen, before the prices stabilise and a fresh global rally gets under way."

Agreed Amit Modak, CEO of Pune-based jeweller PN Gadgil & Sons, who said that demand for silver articles had slumped over the past few months because of the steep jump in prices and that a 5-10% correction was imminent. “When prices rise sharply and suddenly, buyers tend to defer purchases on the ground that they would correct," said Modak. “A 5-10% correction would see some buying emerge."

Also read: Don't miss the silver lining in the gold-equities bull run

Of silver, gold and copper

Silver's rally has been fuelled by a parallel rise in gold and copper prices to record highs due to central bank actions and Chinese demand, respectively.

While global central bank buying catapulted international spot gold to a record high of $2,450.07 per ounce ( 74,222 per 10 gm approximately) on Monday, China’s announcement of a rescue package for its property sector pushed copper to a record high of $11,104.5 ( 9,36,000) a tonne on LME.

Meanwhile, the international spot price of silver hit a 13-year high of $32.51 an ounce on Monday. The lifetime high for the metal stands at $49.8 an ounce on 25 April 2011, according to Bloomberg.

Alos read: Why Devina Mehra is bullish on silver

Silver’s recent global rally along with that of copper has been fuelled by its use in electric vehicles, solar panels and semi-conductors. India relies on imports of silver to meet domestic demand.

Indeed, with prices holding above 70,000 a kg, Washington-based Silver Institute, a global silver lobby, expects Indian investors to liquidate a significant quantity of the 17,500 tonnes of bars and coins purchased over the past 10 years.

“....we believe this year’s Indian investment could see a strong increase as the price has held above 70,000/kg, which in turn has led to price expectations turning more positive", the institute’s World Silver Survey 2024 released in mid-April noted, adding that Indian investors have bought upwards of 563Moz (17,500 tonnes) of bars and coins in the past 10 years and “there remains a risk of large-scale liquidations".

Also read: Catch the glitter: Silver up 11% YTD on import volume, likely to outshine gold in near-term; How should you invest?

Demand destruction

Another signal of demand destruction is visible in the landed rate of silver trading at a premium to MCX’s silver price. If spot demand was high, the spot market price would have instead traded at a premium to the bank rate.A banker who heads the bullion desk at a private bank said that the bank rate was around 96,000 against the MCX rate of 92,475. He believes the Indian spot rate could head toward the 1 lakh mark on short covering by global traders.

According to the banker, investors or traders on exchanges like Comex of the CME (Chicago Mercantile Exchange) group or Shanghai Futures Exchange (SHFE) could begin to cover their shorts with prices having risen 34% to $31.62 an ounce year-to-date and showing no sign of relenting.“Once that happens, prices could rise rapidly toward the 1 lakh mark, before longs liquidate their bullish bets," he said.

In 2023, India’s silver imports accounted for 73% (3,475 tonnes) of total supply of 4,742 tonnes, with mine supply standing at just 739 tonnes, as per UK-based independent precious metals research consultancy Metals Focus.

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