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Wednesday, May 2, 2012

Moneyguruindia - Silver to ride on growing demand from industrial sector

Moneyguruindia - Silver to ride on growing demand from industrial sector

Silver, the well known volatile white metal, had a delightful performance since the beginning of the year 2012. But after March, prices dipped to some extent and remained in tight range of Rs 55,000-59,000 in the domestic market. 

Silver has dual properties as bullion and base metal and when base metals rise, that is also supportive for the silver. 

Recently, prices have taken good support at Rs 55,000 levels in MCX and the decline in the US dollar is also keeping sentiments upbeat in base metals and bullion.

Safe-haven assets are likely to perform well if there are more jitters around as seen in euro zone as investors will turn to park their funds in gold and silver. 

Furthermore, the movement of the rupee will also be vital for silver movement in the domestic market. Investing in gold and silver for financial survival has become a necessity as the entire world is now undergoing financial instability. 

What is adding to the appeal of silver to investors is the huge and growing industrial demand for silver, which means that investing in silver could be profitable in the time to come. 

The projections released by the US Fed after the FOMC meeting showed officials expect the economy to continue to expand at a moderate pace for the near-future. 

The 2012 growth expectation was upwardly revised to 2.4 to 2.9 per cent from the 2.2 to 2.7 per cent range in January, while the 2013 growth forecast was slightly reduced to 2.7 to 3.1 per cent from the 2.8 to 3.2 per cent.

On the job front, the unemployment rate forecast was shifted down from January’s 8.2 to 8.5 per cent range to the 7.8 to 8.0 per cent range. Similarly, 11 of the seventeen Fed members saw no rate increase before 2014 while seven see the benchmark rate below 1 per cent in 2013 and five saw the key rate at 1 per cent or higher in 2014.

Fed chairman Bernanke went on to note that the FOMC plans to continue with the highly accommodative policy as some of headwinds remained, such as a “depressed” housing sector, the financial crisis in Europe, and credit tightness. 

He reiterated that the headline inflation is close to or below 2 per cent target, and a recent increase in prices was caused by temporary shock in oil sector. 

“There is no presumption even in our econometric models that need inflation well above target in order to make progress in unemployment.

Though he continues to endorse the Fed’s 2014 interest rate pledge, he expressed his hope of a rate rise at some point in the near-future as higher rates would indicate a strong recovery. Chairman Bernanke also emphasised that Fed funds guidance is conditional on economic condition.

Resurging investor interest and record estimate of industrial demand for silver is another factor to support the prices. Manufacturers are expected to use 15,415 tonnes of silver in 2012, 2.5 per cent more than in 2011, thereby reducing the excess by 41 per cent to 3,297 tonnes. This is likely to be felt as the manufacturing industry is gaining momentum slowly in the US.

With record high gold prices, some Indian people have started using silver in jewellery and that will result in more imports to India. 

Silver prices may witness volatile movement in 2012 on global the macro-economic uncertainties and a possible fall in industrial demand for the commodity. Investment demand may gain, especially in India, where demand usually comes from farmers and rural households who store their savings in silver bangles and coins. Depreciation in the local currency has also led to an increase in import costs of bullions.

The Indian market has witnessed a move from jewellery to bars and coins with total silver demand expected to exceed 900 tonnes compared with last year while China physical investment and futures trading have grown tremendously.

The growth of institutional investors has been the key driver of silver prices in recent times - hedge funds and mutual funds have increased their exposure to silver futures. 

Private investors and high net worth individuals have played their part in boosting silver demand and prices with private investors investing more in bullions and bars as a measure of wealth preservation and safe haven play. 

On the other hand, high net worth individuals (HNIs) have opted for OTC trading while the less rich lot have opted for exchange0traded funds and physical purchasing. 

The primary reason for investing in silver instead of gold results in greater profits. When masses come to this market, they will buy silver, and in the aggregate the masses have more money than the wealthy.

Regarding the demand of silver, household demand didn’t rise from past 10 year whereas photography use has declined sharply. Fabrication uses rose marginally up, but it is industrial uses which is giving edge to the silver demand. Demand pattern has significantly changed in past few years. 

Consumption of silver in electronics accelerated to 120 per cent since 1999. Silver use in photovoltaic panels started in 2000, and use is up 640 per cent since. Silver was first utilised in biocides, antibacterial agents, in 2002 and, while a little percentage of total silver use; it is grown six-fold within the last couple of years. 

The Silver Institute forecasts that total industrial use of silver will rise by 36 per cent over the next five years, to 666 million troy ounces per year.

Chinese silver net import dropped sharply by 67 per cent to 232 tonnes in November 2011. Chinese silver net import dropped sharply 67 per cent to 232 tonnes in November last year, showed the latest Chinese trade statistics. 

November exports were the highest recorded in 12 months. At 232 tonnes, imports were down 71 per cent YoY, their lowest level since January 2009. The Dragon nation imported 78.03 million ounces in the first 11 months of 2011, down from 115.53 million tonnes in 2010. 

By far, the bulk of Chinese silver demand is industrial rather than investor-based and Chinese demand for small bars and coins is small market at 3.7 million ounces in 2010, with Chinese investors preferring to play the paper silver market since physical imports attract a hefty value-added-tax charge, unlike gold.

The gold- silver ratio has shown steep fall in the beginning of the year 2012 and made low of near 48 during end of February when silver increased at faster pace than gold but from March onwards the ratio moved in steady uptrend and tested nearly 53 and the ratio can face resistance at 54-55 and can come in range of 50-51 in near term.

Silver top consumers are US, China and Japan while India is the fourth largest consumer. It has largest industrial demand as compared to jeweler and silverware. 

A versatile metal, silver is used in jewellery, water purification, photography as well as solar panels, flat-screen television sets, computers and mobile phones. Although investment has played a key role in pushing prices to the current levels, silver is also riding high on growing demand from the industrial sector, which accounts for more than half of global silver fabrication demand.

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