Precious metal analyst Sanjiv Arole examines the reasons why global watchers expect silver to outperform all other precious metals in 2021.
India revels in its glorious past — history, tradition and heritage. Indians proudly claim that they gave the world ‘0’, taught the world plastic surgery and the technique to remove cataract, the first university in the world, religions like Buddhism, Jainism and Sikhism, games like chess, snakes & ladders, and so on. It even gave ‘basmati’ rice to the world. Today, it is not enough to bask in past glory.
Even when it comes to the gold-silver markets, not many would probably know that it was India that conceptualised and even applied for the first gold ETF in the world in 2002. Benchmark AMC pioneered the concept of ETFs when it applied for gold ETF in India in 2002. Then bureaucratic and regulatory red-tape issues took over and the first global gold ETF was launched on 28th March 2003 on the Australian Securities Exchange by ETF Securities. Even silver exchange traded products (ETPs) took off in 2007 by Securities ETF. Thanks to procrastinations by multiple regulators, India became a laggard as it launched its gold ETF only in 2007. As far as silver ETPs in India are concerned, SEBI has finally put the launch of silver ETPs under active consideration.
Gold as well as silver ETFs revolutionised investment in gold and silver. No longer was it necessary to physically hold on to the precious metals. Storage of the precious metal became less voluminous as the AMC did not have to physically store all the gold or silver that backed gold or silver ETFs. It became the preferred vehicle for investors who did not wish to hold gold or silver in physical form. Professional investors could easily shift their investments from stocks, bonds, etc to gold and silver ETFs. Storage costs and security risks too were taken over by the AMC and the investors could have all the benefits of gold or silver at a much lower costs on account of storage, security, etc. The huge gold rally in 2011 saw investors in the Western world invest heavily in gold ETFs. Even last year, when gold scaled its all-time high levels of $2,067 per ounce, total gold investments in gold ETFs was to the tune of 3,909 tonnes in October 2020 against 3,631 tonnes recently.
Silver ETPs had a slightly late start as they made their debut only in 2007. However, the silver ETF market globally is much deeper. In 2020, record inflows were witnessed in silver ETPs, with a rise of 10,229 tonnes, global ETP holdings surpassed one billion ounces (31,100 tonnes) for the first time before closing the year 2020 at 33,182 tonnes. As a percentage of total silver supply in a given year, investing in silver ETPs in a year far surpasses investments in gold ETFs.
In India, market watchers, experts and analysts all opine that silver ETPs would make a huge difference to the investment community. The impact of silver ETPs on investor behaviour could be far more than that caused by gold ETFs. For, storage of silver is a major issue due to the sheer bulk of the white metal. Moreover, as silver is a much cheaper metal (the gold: silver ratio being around 70 now) it facilitates purchase of larger quantities of the white metal. Investment in silver ETPs would negate the need to store large quantities of silver. Even players in the futures markets would find silver ETPs a better option as the question of delivery of the bulky metal would not arise. Speculators on the commodity exchanges were saddled with large quantities of silver when they took delivery after the silver price crashed in India from around Rs.70,000 plus per kg in 2011. Such speculators were only able to offload their silver last year when silver once again crossed the Rs.75,000 per kg mark in August 2020. Then again when the white metal scaled Rs.73,500 per kg again in May 2021.
Elsewhere, the year 2021 was expected to be the year of silver by most analysts around the globe. They expected silver to outperform gold and looked to the silver price reaching record levels. The year 2021 began on a different note for the precious metals basket. Silver that ended 2020 at $26.48 per ounce shot up by over 11% to touch $29.58 per ounce by 1st February, the highest for the year so far. Platinum first fell its lowest for the year at $1,068 per ounce before, buoyed by the 4th consecutive year of deficit, it soared to its highest for the year so far at $1,306 per ounce by 11th February, a gain of over 22%.
In contrast, while gold initially rose by 3.71% to $1,957 per ounce by 6th January, it then slumped by over 12% and declined to $1,683.85 per ounce on 6th April. Palladium declined by around 4% to $2,244 per ounce by early February. This initial surge in silver and platinum prices caused many analysts to predict that 2021 would be the year for the two white metals, silver and platinum. In fact, in the annual LBMA price forecasts made by top precious analysts and experts on 15th January, 2021, many predicted the average silver price for 2021 to increase by over 38% to $28.50 per ounce. Next in line was platinum at over 28% to $1,131.50 per ounce in 2021. By contrast, both gold and palladium were predicted to rise by a more modest 11%.
No Silver Lining
However, thereafter, while both gold and palladium recovered, silver and platinum ended lower than their peak levels for the year. Silver declined to its lowest for the year by over 10% at $24 per ounce on 31st March, only to end on 6th August at $24.975 per ounce, a decline by 5.92% over its 2020 end price. In spite of starting with a bang, gold ended on 6th August at $1,762.9 per ounce with an overall decline of over 7%. Gold and silver plunged on the same day as US non-farm payroll data was much more than the consensus estimate. Even other US data turned bearish for the precious metals.
Yet, most global watchers and analysts still expect silver to outperform all other precious metals in 2021, and feel that silver as well as gold could still adhere to LBMA forecasts made in January 2021. The prediction is based on the belief that the stock market bubble could burst anytime in the second half of 2021.
Moreover, a rollback on printing dollars and higher interest rates as well as higher inflation could hurt the US economy and it would not be an easy transition. As a result, the precious metals could be back in fray. Gold bulls predict $3,000 per ounce and above and silver could follow suit. Then, silver has managed to pull back the gold-silver ratio down to 70-71 from a high of around 125 that was seen just last year. At present, the silver price is bogged down because even though trillions of US dollars are printed and doled out to needy Americans, it has turned counterproductive as many Americans turn down jobs as they are getting easy money. The economy has shown good growth, but manufacturing and trading has taken a hit.
In India, silver imports that fell by over 69% in 2020 to around 2,200 tonnes continued to barely trickle in. In fact, silver imports in the April-June quarter of the current year are said to have declined by over 90%, January imports were a mere 290-odd kg. Therefore, silver demand was mainly met by heavy scrap inflows into the market in 2020 as well as in 2021. This was mainly fuelled by the silver price scaling over Rs.75,000 per kg in August 2020 and then again reaching a high of Rs.73,500 per kg in May 2021. The volatility in price did not help boost demand for silver.
The demand too was severely impacted by the second wave of the pandemic in March-April that caused widespread lockdowns across the country. In Mumbai, even after easing of restrictions, shops were allowed to be open only on weekdays till 4 pm. All of the above impacted the jewellery retailers as well as manufacturers. Then, the advent of compulsory hallmarking of gold from 16th June caused the gold trade to push the pause button. Even silver retailers were affected by the confusion in the trade as well as buyers/investors.
Meanwhile, following compulsory hallmarking in gold, compulsory hallmarking in silver too is on the anvil. Currently, hallmarking in silver is voluntary and many in the trade aver that compulsory hallmarking of silver is of paramount importance. For too long, very poor quality silver is being palmed off to gullible investors and purchasers of silverware and silver jewellery. This is rampant and those who only sell sterling silver and above are at a great disadvantage. They want silver coins and artefacts also to be included whenever compulsory hallmarking is notified.
That D-day is expected in 2022 or 2023 and it is expected by the trade that the current system of hallmarking in silver is allowed to continue till then. In short, the trade dreads the need to melt all silverware and silver jewellery when compulsory hallmarking is introduced. The volumes involved would be far more than in gold.
Finally, silver that got off the blocks in early 2021 and gained a sizeable lead over other precious metals now seems to have hit a roadblock of sorts. The current Olympics saw many top seeds and firm favourites for the gold medal fall by the wayside. It was supposed to be the year for silver. Fingers crossed!
Sources: LBMA, IBJA, Metal Focus, Trade sources and Newspapers.