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Buy silver on correction
Ashok Mittal/ 25 Feb 13 | 12:28 AM

Silver is a commodity, which follows other precious metals. However, unlike gold, silver is also used for industrial purposes. These days demand for silver has increased for investment purposes, compared to industrial use. Investors have started buying silver-backed exchange-traded funds (ETFs) and physical silver for investments.

Ishares Silver Trust, the world’s largest silver ETF’s silver holdings have been consistently rising. In January 2012, the fund’s holding stood at 9,606 tonnes, which increased to 9,686 tonnes by June. In the quarter ended September, holdings were up 2.62 per cent at 9,940 tonnes. In the last (December 2012) quarter also, holdings were up almost 1.5 per cent. For the full year 2012, the fund’s holding rose five per cent at 10,084 tonnes. The fund has significantly increased its holdings in 2013 as well. Within two months it has gone up 4.33 per cent and is currently at 10,522 tonnes. These ETFs are backed by physical silver, which indicates that the physical demand for silver has also gone up, especially in 2013. And the rising trend in ETF holdings along with the industrial demand for silver could lend support to the prices of this precious metal.

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A look at the global physical demand and supply scenario shows the net implied investments to be growing tremendously. Implied investments went up from 152.2 tonnes in 2011 to approximately 231 tonnes in 2012. This jump is majorly due to several events such as quantitative easing (QE3), bailout of Greece, etc. Similarly, several events are lined up for 2013, too. One major event which came was the US fiscal cliff, followed by Sequester. Many more are to follow. We will see the direct impact of these events on silver in a positive manner. Like gold, silver too, has a safe-haven appeal, and Indians are rushing more towards it as domestic gold prices are hovering high around Rs 30,000 per 10g.

The silver market is much smaller than that of gold. So, a new dollar invested in silver has a much greater impact on the price. That makes silver more volatile than gold. A look at the ratio of gold to silver shows that an average one per cent move in gold can result in two per cent move in silver as the coefficient of correlation between the two is 0.5 (or 1:2). The demand for silver could be higher in the coming days as the recent duty hike in gold has impacted its demand. The rupee will also form a crucial part in determining the price of silver. As the upcoming Budget can show some positivity in the Indian economy and also the rupee, the prices of silver could slide initially but physical demand in the domestic and international markets will drive the prices higher in later weeks.

Prices are currently around Rs 54,000 per kg ($28.7/oz). We recommend buying silver after it declines to Rs 51,500 ($26.5/oz), as technical indicators suggest good support at Rs 51,000 ($26). From these lows, prices can again rise to Rs 56,000 ($31) in a couple of months, with the next target being Rs 57,500 ($33.5). Price fluctuation in the rupee can put pressure on the prices initially. However, safe haven appeal during “Sequester" in the US can pull back the prices in international markets later.