Conspiracy theories abound on the white metal’s spectacular rise.
Silver has been on steroids for the last one month. It has risen 24 per cent from Rs 58,820 in just one month, prompting retailers to offer advance booking to investors before Akshay Tritiya.
Though prices of the white metal have been rising all through the past one year, the frenzy has been visible in the last one month. Typically, gold and silver move in tandem and the ratio between them is 55. Essentially, it means how much silver one can buy for the price of an ounce of gold. The ratio has been narrowing in the last few months as silver has run ahead of gold.
While there is no denying that prices of precious metals are linked to the strength of the dollar, the unprecedented spike has stunned the market. So, few commodity analysts are willing to speak on the rally’s sustainability, but most say the spurt has less to do with demand, and more with abnormal positions taken by some large players.
One popular theory doing the rounds on the internet and among banking circles is the huge build-up in short positions by a US-based global investment bank. It is alleged that the bank has been shorting silver for some time now — totalling nearly three billion ounces. If this is true, it’s a matter of concern as this accounts for nearly one-third of the world’s silver reserves. Interestingly, these positions, analysts claim, are not backed by physical assets! Some even go to the extent of suggesting that the bank is doing this to prop up the dollar, which has been falling against a basket of other currencies in recent times.
Short positions typically help drive down prices of the underlying asset, but if the price of the asset rises, either the investor has to bear mark-to-market losses or cover short position by buying more contracts. This drives up the price of the asset in the short-term. Short-covering has driven silver price further in the last few months.
Analysts say since the position is huge, unwinding cannot be simple, as physical supplies have been disappearing from the market for a number of reasons. Commodity experts believe these positions will have to be squared of in off-market deals, which will drive down the prices of precious metal. Jayant Manglik, president, Religare Commodities, says the sharp movements indicate factors other than fundamentals influencing silver price. Therefore, he sees some near-term correction, following which silver will again be an attractive proposition.
