Home / Markets / Commodities /  Silver may continue to outshine gold this year

Gold’s volatility in CY2021 until now has been no less than a roller coaster. After a good rally last year, we witnessed some profit-booking at the start of 2021 for gold, following uncertainty on back of US Presidential elections, start of vaccination process in various major economies and volatility in dollar and yields which failed to die down. Selling in ETFs and unwinding in CFTC positions also weighed on overall market sentiment. Although, with all these uncertainties, precious metal pack are also backed by strong fundamentals which have kept hopes high for bulls.

On other hand, silver was supported by increased investment and industrial demand. Silver continues to benefit from the expansionary monetary and fiscal policies worldwide and it is also getting influenced from the rally in industrial metals. Precious metal plays a critical role in the environmentally friendly technologies of the "green revolution." President Biden has also showed a lot of interest in the use of green technologies like solar panels, EV, 5G technology etc.

The Democratic-controlled US Senate passed a massive $1 trillion bi-partisan infrastructure package pushed optimism around the US economic growth. This infra bill would focus on development of transport, housing infra and other sectors which could push industrial metals higher. Apart from that U.S. House of Representatives has approved the framework for Joe Biden’s $3.5 trillion domestic spending package after Democrats reached a deal to advance legislation following days of tense talks within the party. As spending on infrastructure increases so does demand for industrial metals increase, which clearly justifies recent rally in most of the base metals like copper, nickel, and others. Silver being a hybrid metal, the rally in base metals increased bets for white metal as well. Silver does have a dual advantage- as market participants are expecting more stimulus packages from government to support the economy, more development in infrastructure and green economy and also increase in distress amidst all uncertainties hovering in the market.

Fed officials have been reiterating from quite some time about loose monetary policy and also hinting that inflation is just a transitory phase and would not be a hurdle in the path of the U.S. economic growth. Although, in recent Jackson Hole Symposium the Fed Governor Powell did show some concerns regarding the rising inflation, he also mentioned that the Fed could look to taper before the end of this year but there is still time before any change is announced regarding interest rate. 

Debt is rising in the US and volatility in U.S. yields and dollar continues to remain high suggesting that once should brace for heightened volatility in near future. Many Fed members continue to stick to their earlier comments but some have showed concerns regarding growing uncertainties thereby supporting metal prices.

Now, let’s glance through, how both precious metals have performed. Starting with silver, it marked a high of $28 in May 2021, and returns of 10% YTD; which was 43% in CY20. On other hand, if we look at gold, it marked a high of $1899 in May, it gained $150 from the lows, for the month, and is on the verge of reaching breakeven on returns, on YTD basis, which was 20% in CY’20.

ETF holdings doesn’t directly affect the prices, but it surely affects the overall sentiment in market. In 2020, ETF inflow for both the metal in previous year was quite significant although with the selloff in prices, we saw an outflow in ETFs as well. Gold SPDR holdings has witnessed an outflow of almost 13% on YTD basis, whereas silver has seen an outflow of 9% in iShare holdings. Gold/Silver ratio is also one of the factor which justifies the move for silver, was once at the highs of 127 last year, is currently trading 75 levels.

There are several tailwinds which makes us believe that precious metals will be stronger of course with bouts of corrections. Rising inflationary expectations, increasing debt, central banks' loose monetary policy, stimulus packages, geo-political uncertainties and other factors continue to keep the metal prices supported. Along with this, as mentioned above silver would benefit from both i.e. base metal as well as a precious metal. Hence we believe that the white metal has and could continue to outshined gold in terms of returns for CY2021 as well.

Even though silver’s number speaks better than gold, we continue to maintain our bullish stance for both the metals:

We continue to maintain our positive bias on gold for short to medium perspective targeting new life time highs towards $2,050 followed by $2,200. Similarly on the domestic front, we expect the metal to rally towards the immediate targets of Rs.50,000 followed by Rs.56,500 and above over the next 12-15 months.

A decent recovery has been seen in MCX silver from its recent low and some more northwards move will likely be seen in the medium-term. It has strong supports around Rs.60,350 – 59,500 while bias looks positive as long as price holds above the same. If prices sustain and close above the recent high around Rs.64,550 will lead the move towards Rs.68,500 – 70,200 levels. The metal will continue the northwards move and majorly can target 82000 once the medium term targets are achieved. However, downside could extend further if price break and sustained close below the recommended support zone. Lower supports are at Rs.57,200 – 55,500 levels.

Navneet Damani is VP Research, Commodities & Currencies, Motilal Oswal Financial Services

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