Is silver the new gold? Key triggers to watch out for in precious metals this year

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Some analysts and traders bet that silver prices will outperform gold this year. Silver’s historic price performance relative to gold and the ongoing demand-supply dynamics may be the reasons behind such beliefs.

Anyhow, silver is glittering more than gold nowadays even though the yellow metal has entered the correction zone after hitting its all-time high in August last year. There were hopes of an increase in industrial demand as many large economies swiftly revived from the negative impact of Covid -19 pandemic and this boosted the sentiment of the metal.

Gold and silver have a high positive correlation and historically silver has always been a laggard of gold’s price performance. Gold triggers the initial move in bullion and eventually, silver gains traction. However, in the recent bull-run in precious metals silver remained silent, making it a hot investment theme in hopes that it will follow gold’s bullish trend later. 

Many analysts claimed that silver is undervalued relative to gold. Speculators tried to trigger a short squeeze in silver in February this year, but the attempt failed. Silver also did not participate in the recent bull rally in base metals, which lifted the prices of many metals to multi-year highs.

Typically, investors buy silver for the same reasons that they purchase gold. It has similar characteristics to gold. The metal is considered to be precious as it is rare and usually considered to be a safe investment during economic and political uncertainties. It is often considered a hedge against inflation as well.

Silver may benefit from improving global economic conditions as it is largely consumed for industrial purposes. Almost half of the global demand for silver is for industrial production, while it is about 10-15 percent in the case of gold. The metal is highly consumed in the electrical and automobile industries. Therefore, signs of economic optimism and recovery in industrial activities will call for an increased demand for the precious white metal.

Anyhow, a sharp rally in silver cannot be justified at this momentum. Outlook of gold currently looks feeble and silver is never bullish when gold prices are in a bear market. However, if the pandemic-related economic uncertainty worsens further, demand for silver as a safe asset may be boosted. Also, since the commodity is highly volatile, more speculative actions can be seen in the metal in such scenarios.

Key triggers to watch out for bullion this year

After testing an all-time of $2072 an ounce gold corrected more than 15 percent so far on improved global economic optimism and a recovery in the US dollar. Positive economic releases from key economics after a series of economic stimulus measures helped the global economy to recover quickly which eased gold’s safe-haven demand recently.

Looking ahead, bullion investors should focus on the growth outlook of countries to check whether the second wave of Covid 19 has any negative impact on its growth rates. Likewise, additional fiscal stimulus measures by central banks, volatility in US dollar and changes in the US bond yields will also have an impact on the performance of bullion. Physical demand from top consumers like India and China is another price influencing factor for bullion this year.

The article appeared in Economic Times on 18 April.

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