While gold has been underperforming for most of this year, silver's trajectory has been no different. In fact, the grey metal has been even more under pressure since January. For the year-to-date, silver has been down a whopping 36 per cent, the worst of key commodities across the board. The key factors responsible for such a steep drop are: Subdued inflationary pressures in the west, easing tail risks, fears that the US Federal Reserve is inching closer toward tapering its asset-purchase programme, rising US Treasury yields and a stronger dollar.
More importantly, from a fundamental perspective, silver has been in supply surplus in the previous five years. Separately, mine production could be, to some extent, curtailed this year.
As the surplus in silver continues, fabrication demand for the grey metal is extremely crucial. For the past two years, this demand has declined. While industrial demand could rise this year, for the first time in three years, it is unlikely to gain by a huge margin, as global growth prospects are still somewhat subdued. As such, we do not expect much change in fabrication demand this year. Meanwhile, investment demand is likely to weaken further, despite the recent plunge in prices, in large part due to rising Treasury yields in the US, which would raise the opportunity cost of holding assets that yield no income. With fabrication demand unlikely to change much and with investment demand likely to continue eroding, we expect silver to slip lower, possibly towards $17 later this year. In the short term, however, prices are likely to be volatile. With the market heavily positioned on the short side, a pullback towards $21-22 cannot be ruled out, especially if data from the US delays the likelihood of the stimulus being scaled back earlier than what markets are expecting at the moment. However, if the US data add fuel to the fire, that the stimulus could be tapered in the next couple of meets, then a rebound in silver is likely to be rather constrained. In the domestic market, we expect silver in India to fall towards Rs 35,000 in the short term while the upside could be limited to Rs 45,500 a kg.
The author is executive director , Anand Rathi Commodities
