Silver is losing its safe haven status, better avoid long-term bets

Post-pandemic industrial demand helped commodity prices to stream towards record or multi-year highs earlier. The rally was witnessed in almost all commodities like agriculture, energy, bullion, and the base metal complex. However, silver was different in the bullion complex, unlike its other companion, gold.

In the last two years, silver prices in the overseas market broadly traded in a range of $29-16.50 an ounce. Although other precious metals like gold and palladium have surged to new all-time highs, silver traded flatline near half of its record high levels. A shortfall in investment demand dominated the trend of the metal.

Meanwhile, in the domestic futures market, prices are supported by a weak currency and a demand recovery for silverware and ornaments. While making utensils and jewellery, the metal is often considered as a substitute for gold, which is currently hovering near multi-year highs.

Over the past couple of years, several micro and macroeconomic factors have supported global commodity prices. Prices of other precious metals like gold and platinum have risen to record highs during this period. But a rapid shift of traditional silver investors to other investment avenues halted gains in the commodity.

Historically, silver tracks the performance of gold. So, it was a preferred safe haven asset among investors. However, in recent years, although the metal tracks the movements of the yellow metal, it lacks momentum. This has reduced the appetite for silver, especially from professional investors, making them the net sellers of the commodity.

Nevertheless, the industrial demand for silver has been on the upside trajectory. It posted an increase of 9% last year and was its highest since 2010. This was due to limited pressure from substitution and thrifting, rebuilding inventories by end users, and its demand in the green economy applications. The recent changes in the energy and automotive industries have also contributed significantly.

Silver is an integral part of many green technologies. Since the world is moving towards a green economy, investment in decarbonization and electrification continues to grow. It is largely used in renewable energy solutions, especially in photovoltaic industries. Silver loadings are used in electric vehicles as well. These new and emerging applications are offering structural support to the metal.

Last year, silver mining and recycling activities improved significantly from the pandemic-related supply disruption in 2020. Global output increased by 5.3% posting its biggest annual rise in production since 2013. Recycling also rose for the second year in a row to an eight-year high. However, despite an improvement in output, global silver markets were in deficit.

Demand has also been reported to be higher, especially from the physical market. Coin and bar purchases contributed a large chunk of the volume followed by industrial demand. The resumption of industrial operations and re-opening of businesses after the pandemic-related lockdown largely assisted the sentiment.

Contrasting forces continue to dominate the market outlook. Factors like central bank policies, geopolitical tensions, and currency movements are less expected to have an impact on investment demand. Meanwhile, the new and emerging industry demands perhaps could offer stiff support to prices.

On the price front, overseas silver prices remain at $28-14 ounce levels, and breaking any of the sides would suggest fresh directional moves. However, on the domestic side, weak INR, high duties, and a steady physical demand could dent major crashes in prices.

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