Some analysts and traders are betting that silver will outperform gold this year. Silver’s historic price performance relative to gold and the ongoing demand-supply dynamics may be the reasons behind such beliefs. Silver is glittering more than gold nowadays even though the yellow metal has entered the correction zone after hitting an all-time high in August last year.
There were hopes of an increase in industrial demand as many large economies swiftly revived from the negative impact of Covid -19 pandemic and this boosted the sentiment in the metal.
Gold and silver have a high positive correlation, and historically silver has always underperformed gold. Gold triggers the initial move in bullion and, eventually, silver gains traction.
However, in the recent bull-run in precious metals silver remained silent, making it a hot investment theme in hopes that it will follow gold’s bullish trend later.
Many analysts claimed that silver is undervalued relative to gold. Speculators tried to trigger a short squeeze in silver in February this year, but the attempt failed. Silver also did not participate in the recent bull rally in base metals, which lifted the prices of many metals to multi-year highs.
Typically, investors buy silver for the same reasons that they purchase gold. It has similar characteristics to gold. The metal is considered to be precious as it is rare and usually considered to be a safe investment during economic and political uncertainties. It is often considered a hedge against inflation as well.
Silver may benefit from improving global economic conditions as it is largely consumed for industrial purposes. Almost half of the global demand for silver is for industrial production, while it is about 10-15 per cent in the case of gold. The metal is highly consumed in the electrical and automobile industries.
Therefore, signs of economic optimism and recovery in industrial activities will call for increased demand for the precious white metal.
A sharp rally in silver cannot be justified at this momentum. The outlook on gold currently looks feeble, and silver is never bullish when gold prices are in a bear market.
However, if the pandemic-related economic uncertainty worsens further, demand for silver as a safe asset may get a boost.
Also, since the commodity is highly volatile, more speculative action can be seen in the metal in such scenarios.
Key triggers to watch in bullion this year
After testing an all-time high of $2,072 an ounce, gold corrected more than 15 per cent so far on improved global economic optimism and a recovery in the US dollar.
Positive data from key economies after a series of stimulus measures helped the world economy recover quickly, easing gold’s safe-haven demand recently.
Looking ahead, bullion investors should focus on the growth outlook of countries to check whether the second wave of Covid 19 has any negative impact on its growth rates. Likewise, additional fiscal stimulus measures by central banks, volatility in the US dollar and changes in the US bond yields will also have an impact on the performance of bullion.
Physical demand from top consumers like India and China is another price influencing factor for bullion this year.
(Hareesh V is Head of Research on Precious Metals at Geojit Financial Services. Views are his own)