In 2014, spot silver prices gained more than seven per cent, taking cues from gold prices which rose around 12.5 per cent during the same period. Silver prices have been trading positive due to a host of reasons. The prime one being an appeal for safe haven in times of uncertainty on account of geo-political tensions between Russia, West and the Ukraine over Crimean peninsula. A rise in exchange-traded fund (ETF) holdings managed by the iShares Silver Trust, which rose by around two per cent to 10,165 tonnes as on March 18, 2014 from 9,959 tonnes as on December 31, along with weakness in the dollar index (DX) by 0.8 per cent also supported the prices.
In March, silver prices in international markets have declined around two per cent due to easing of geo-political tensions over Crimea, coupled with weak performance in the base metal pack which has been on a declining trend since the start of the year.
Short-term headwinds in the market
As for industrial demand, certain headwinds create an uncertain scenario for silver prices. Recent data sets released from US and China, the two biggest economies, have showed mixed signs. Chinese Purchasing Managers' Index (PMI) data for February showed the manufacturing index fell to 48.5, while the official PMI released by the government showed a reading of 50.2, the slowest growth in eight months. The US PMI data for the same time frame expanded, as the PMI came in at 53.2, an increase of 1.9 percentage points when compared to January's reading of 51.3. Therefore, the February PMI indicates growth for a 57th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for a ninth consecutive month. In addition, if the PMI for February (53.2) is annualised, it corresponds to a 3.3 per cent increase in real gross domestic product (GDP) annually.
Money managers have continuously reduced their bets on silver for a long time. But, more recently money managers have actually increased their stakes.
Net long positions have been continuously building up from the start of February, wherein funds were net longs 7,675 contracts as on February 11 and have rapidly increased their positions to 20,991 contracts as on March 11, 2014.
But, tightening of monetary policy has always pressurised the white metal prices and spot silver prices declined by more than one per cent on March 19. In addition, expectations of a rise in interest rates in mid-2015 will further exert downside pressure.
Outlook
Slowdown in Chinese PMI growth to eight-month low, along with a decline in the economic activity, raises concerns about demand for the white metal. Tightening of monetary policy in the US will be a likely factor that will exert downside risk for silver prices. On the other hand, improvement in industrial activity, such as rising US PMI indicates that demand for silver might increase with the economy recovering. Last but not the least, interest by investors in the ETF holdings in the first two months of 2014, coupled with hedge funds placing long side bets, can push the white metal higher for the next three months.
For the near term (three months), technically, we recommend buying MCX silver contracts between Rs 43,200-43,800/kg, with a stop-loss of Rs 40,500/kg and a target of Rs 48,500-50,000/ kg (current price is Rs 44,970/kg). In international markets, near-term major support is seen at $19.50/18.50 a troy ounce and resistance at $22/23.30 a troy ounce (current price is $20.23).
In March, silver prices in international markets have declined around two per cent due to easing of geo-political tensions over Crimea, coupled with weak performance in the base metal pack which has been on a declining trend since the start of the year.
Short-term headwinds in the market
As for industrial demand, certain headwinds create an uncertain scenario for silver prices. Recent data sets released from US and China, the two biggest economies, have showed mixed signs. Chinese Purchasing Managers' Index (PMI) data for February showed the manufacturing index fell to 48.5, while the official PMI released by the government showed a reading of 50.2, the slowest growth in eight months. The US PMI data for the same time frame expanded, as the PMI came in at 53.2, an increase of 1.9 percentage points when compared to January's reading of 51.3. Therefore, the February PMI indicates growth for a 57th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for a ninth consecutive month. In addition, if the PMI for February (53.2) is annualised, it corresponds to a 3.3 per cent increase in real gross domestic product (GDP) annually.
Money managers have continuously reduced their bets on silver for a long time. But, more recently money managers have actually increased their stakes.
Net long positions have been continuously building up from the start of February, wherein funds were net longs 7,675 contracts as on February 11 and have rapidly increased their positions to 20,991 contracts as on March 11, 2014.
But, tightening of monetary policy has always pressurised the white metal prices and spot silver prices declined by more than one per cent on March 19. In addition, expectations of a rise in interest rates in mid-2015 will further exert downside pressure.
Outlook
Slowdown in Chinese PMI growth to eight-month low, along with a decline in the economic activity, raises concerns about demand for the white metal. Tightening of monetary policy in the US will be a likely factor that will exert downside risk for silver prices. On the other hand, improvement in industrial activity, such as rising US PMI indicates that demand for silver might increase with the economy recovering. Last but not the least, interest by investors in the ETF holdings in the first two months of 2014, coupled with hedge funds placing long side bets, can push the white metal higher for the next three months.
For the near term (three months), technically, we recommend buying MCX silver contracts between Rs 43,200-43,800/kg, with a stop-loss of Rs 40,500/kg and a target of Rs 48,500-50,000/ kg (current price is Rs 44,970/kg). In international markets, near-term major support is seen at $19.50/18.50 a troy ounce and resistance at $22/23.30 a troy ounce (current price is $20.23).
The author is associate director, commodities and currencies, Angel Broking