Silver catching up with gold rally, price spike sharply in global market

After consolidating for a few days, gold and silver prices spiked yesterday on fears that inverse short- and long-term bond yields in the United States will lead to recession

Silver prices reached a three-year high at the spot market here, closing 3.7 per cent higher at Rs 46,840 a kg, the highest since September 2016. 

The metal has given a 29.5 per cent return in three months. On the Multi Commodity Exchange, the September silver contract which expires next week is trading at Rs 46,600 a kg. The December contract has reached Rs 48,000 a kg. 

On Tuesday, silver started moving faster than gold on the Comex, (benchmark exchange for bullion derivatives and a division of the Chicago Mercantile Exchange) on worry that the  inverse short-term and long-term bond yield in the US would lead to recession. 

Gnanasekar Thiagarajan, director at Commtrendz Risk Management Services, says: “Silver has started catching up with gold. The ratio of gold to silver prices has fallen from a peak of 93 to 84 now. It is customary for silver to rise in a lagged manner with gold. So far, gold rose and that made silver cheaper; investors have now piled on to it.”

He sees the trend continuing for some time, with silver’s price rising another two per cent in the international market, from $18.28 an ounce now to $18.65. In India, to Rs 48,000 a kg. In the medium term, he feels the rally could take silver to Rs 55,000 a kg.

American two-year treasury bond yields were higher (1.52 per cent) than the 10-year ones (1.48 per cent), which many analysts see as a sign of coming recession. 

This was also seen two weeks ago when the market fell. Repetition of this signal has created worry, making investors look for safe havens, spurring the buying of gold and silver.

In a recession, gold will do well due to its traditional safe-haven status. Silver, as a precious metal, follows gold but 56 per cent of the demand for it, globally, is from industry, with another 21 per cent for jewellery and 18 per cent being investment demand.  In a recession, silver’s industrial demand will fall and that might not allow the white metal to outperform gold. 

In India, the industrial demand for silver is hardly 20 per cent. That for jewellery, investment and silverware constitutes the bulk.

The question remains whether there will be a recession. Nigam Arora, algorithm analyst and author of the popular Arora report, does not think so. He says the US has taken protective measures and the measures in question "are nowhere near the past”, with only inverse bond yields not a recession signal. Negative interest rates are prevalent round the world and these cushion any potential drop in the stock market. Also, central banks have more tools such as quantitative easing to fight a recession. Politicians are also more prepared on the fiscal front. If the US-China trade war gets resolved, and there is hope on this, it might trigger renewed global growth and higher stock prices. He also says mortgage standards are much stricter than at the onset of global recession in 2008, the bigger danger being corporate and sovereign debt.