Silver expected to outshine gold after Indian festival season..Backed by industrial demand as well as buying for investment, silver is expected to continue its rise into next year.
Author: Shivom Seth
Posted: Wednesday , 10 Nov 2010
MUMBAI -
Silver prices in India surged to an all-time high of Rs 38,900 per kg on Diwali day (November 5).
Gold prices matched the metal stride for stride reaching near record levels of Rs 21,100 per 10 grams, just Rs 1020 less of the record price it had touched on October 15 this year. In the international market, the yellow metal rose to a record level of $1,394.60 an ounce.
But, post Diwali, silver seems to be gaining ground. On November 9, the white metal gained Rs 405 a kg to hit a new high of Rs 32,030 on expectations of improvement in industrial demand. In Mumbai, standard gold closed at Rs 19,020 per 10 gm on Tuesday, up Rs 165 over Monday's closing price.
Silver prices in London gained 1.9% to $20.42 an ounce, the highest since March 2008. The metal has gained 21% this year.
There are two main reasons why silver surged. The first is increased buying activity with most retailers making token purchases for Diwali, considered to be an auspicious day for buying precious metals as per Hindu mythology. The other was the price of silver in the overseas markets, which also rose sharply to above $26 an ounce, its highest since March 1980.
Gold price have surged in the last few trading sessions and reached a new peak right in the middle of the Diwali festival, forcing retailers to purchase silver coins for token buying.
``The demand for gold was limited in certain areas and customers picked up silver coins as a token purchase on this festival, which can also be used in pooja on Diwali,'' said Tarun Shah, a Mumbai-based silver mart owner.
Silver coin prices rose by Rs 300 to 43,200 for buying and Rs 43,300 for selling of 100 pieces, which were also considered record levels. In a similar fashion, gold of 99.9 per cent and 99.5 per cent purity rallied by Rs 250 each to Rs 20,100 and Rs 20,000 per ten grams respectively.
Even compared to the previous year, the price of gold and silver jumped 23.5% and 39% respectively. The rates were Rs 16,150 per 10 gm and Rs 27,300 a kg in 2009. In a decade, gold rates have gone up by 443% and silver by 469% respectively the metals were at Rs 4501 per 10 gm and Rs 8100 a kg in 2000.
Dealers said the demand for silver coins had gone up since gold had gone beyond the reach of the common man. With the jewellers' hope of doing brisk business dented due to the high price, Indian bullion traders are waiting for business in gold items to pick up later this week. But some analysts feel that demand in India would continue to remain low. However, the pre-Christmas orders may add some shine to the gold buying.
Analysts said in addition to a rally in silver prices in overseas markets, rising demand for the precious metal at domestic bullion markets, also helped silver to cross the psychological mark of Rs 41,000 per kg for the first time in the history of futures market.
The second reason has to do with silver's status as an industrial metal. Silver tracks the price trend of other base metals such as copper, lead, aluminium, zinc and nickel that have appreciated substantially over the last few weeks. Strong industrial production numbers reported recently by India and China also appear to be pushing the numbers.
India recorded a 13.8% growth in industrial output (IIP) in July against the earlier 5.8% registered in June. The IIP figures have been boosted by the performance of capital goods and consumer durables.
While industrial offtake is only a small part of gold demand, some 40% of silver consumption comes from industrial applications, like electronics manufacturing. And if precious metals investment loses momentum, any residual support silver takes from industrial demand is likely to kick in well below current price levels.
Industrial demand surges
Industrial demand has added to the lustre of the white metal. Data shows that industrial silver demand on June 2010 has risen to 5.6 million ounces from 4.7 million ounces, from a year ago period. During the same period, India consumed 235,000 ounces of silver for industrial purposes. That is 12,000 ounces higher than consumption in the year ago period, as per data compiled by London-based precious metals research body, GFMS Ltd.
``Silver is more of an industrial metal,'' Prashant Sen, an analyst at Religare Commodities said. ``With fears of a slowdown behind us and industrial activity rising, its prices have surged.'' While industrial demand has driven silver prices up by 31% in the past six months, investment demand has also kept pace, he added.
``There has been a rise of 26% in iShares Silver Trust Exchange Traded Fund (ETF)," said A Prasadacharya, at consultancy firm, Karvy Comtrade. A silver ETF is a mutual fund that buys silver on behalf of investors and converts them into units that can be traded on a stock exchange.
Interestingly, Vedanta group company, Hindustan Zinc Ltd, the largest domestic white metal producer, has decided to push the annual output to over 190,000 kilos by March 2011. That is around 18 times more than what the state-owned company turned out four years ago.
A company spokesperson said that domestic demand has been huge from chip makers and electronics manufacturers. Along with the demand from chemical industries, both have overtaken volumes demand from the bullion sector, he added.
The company has accordingly increased production capacities to cater to industrial contracts inked in the last two to three years. Traditional silver demand from domestic households has also risen, though at a much slower pace.
Pritam Choksi of Terrence Mall, a Mumbai-based silver contractor, which provides to major electrical and electronics equipments manufacturers said: ``Silver demand is keeping at fairly strong levels as electrical and electronic manufacturers are seeing a good business in the quarter.''
Silver will continue to outshine gold this year, as the white metal responds to the prospect of a surge in industrial demand. Also, re-stocking of inventories, given silver's traditional use, is set to be a powerful demand driver in the near-term, traders said.
Silver prices are mainly driven by the fact that traditional industrial end-users of silver, such as the global electronics industry, have in recent weeks begun to replenish severely depleted inventories.
During the financial crisis, many silver inventories had run down sharply. Traders pointed out that it had taken more than six-months to fully rebuild the inventories to normal levels.
An important factor to understand in the case of silver is that demand from the industrial sector tends to be quite inelastic. This means that buyers have few options and have to pay at prevailing prices.
Traders also noted that the key driver for 2010 silver would be the demand for silver-zinc batteries in ‘smart automobiles' and an array of portable electronic devices. The widespread adoption of silver-zinc batteries is set to be one of the major drivers behind the rise in prices as it may absorb a high quantity of silver, they added.
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