Silver presents a compelling investment option in the present macroeconomic environment, a volatile and broadly overvalued equity market.
This white-grey metal offers robust protection against inflation as well as downside risks due to its high utility and store of value. While its price often moves in tandem with gold, silver tends to be more volatile. With the current uptrend in silver’s price, it is also expected to reach an all-time high level soon.
India is a net importer of silver, ranking among the top five countries in global silver consumption. While silver imports in the country reached a record 9,450 tonnes in 2022, they declined to 3,475 tonnes in 2023 due to a higher base effect and post-lockdown stockpiling. However, optimism among traders in 2024 suggests a potential rebound in demand leading to higher imports.
In February, India imported a record level of 2,200 metric tonnes (70.7 million ounces) of physical silver. Over half of the silver demand comes from the industry as it has the highest electrical and thermal conductivity of all metals. Buoyancy in sectors like solar, semiconductor chips and the development of electric vehicles, which use lithium-ion batteries, are going to stimulate industrial demand and lead to price appreciation of silver.
Apart from this, in the recently concluded Federal Open Market Committee (FOMC), March interest rates have been kept unchanged at 5.25-5.50%, but the Fed Dot Plot suggests a possibility of three rate cuts later in 2024. This has led to a surge in the demand for safe-haven assets worldwide. Many central banks have also started to pile up precious metals in their portfolio.
Silver has historically demonstrated a negative correlation with interest rates — a rate cut will possibly lead to an increase in the silver price. The market is forward-looking. It has already started discounting future rate cuts, leading to a surge in silver prices.
The chart depicting historic movement of silver CFD and US Fed Interest rate is presented below:
AgenciesIf we compare absolute returns of silver in INR with the NIFTY 50 index price returns over 1 year, 2 years and 3 years post rate cut, we get the following position:
AgenciesWe can acknowledge that in each instance silver has outperformed the returns of the NIFTY 50 index.
Silver prices also demonstrate an inverse relationship with the US dollar. A strengthening dollar often correlates with lower silver prices, and vice versa. With US Interest rates already at their peak, the dollar has limited chances of strengthening from here. Applying the purchasing power parity logic, if the value of USD decreases, then to purchase the same quantity of silver more money needs to be spent, thus a rise in silver price.
AgenciesLast but not the least is the silver price itself. Silver is trading more than 50% below it’s all-time high of US$ 49.8/ounce marked in 2011. In rupee terms, silver is trading near all-time highs simply because of rupee depreciation. You can imagine what would happen if silver fires up in international markets.
AgenciesConsidering all of the above points it seems it is ripe to add silver to your portfolio.
Weekly Technical Outlook
AgenciesThe Nifty recovered from lower levels, ending with a gain of 0.33% at 22,096.75 in the last week.
All the sectors participated in the upward movement except Nifty IT, which tumbled nearly 6%. This rally was largely fuelled by the US market reaching record highs, boosting confidence in the domestic market.
Technically, Nifty rebounded from the lower Bollinger band and managed to close above the 50-day moving average (DMA) and closing well above the crucial 22,000 level further strengthened the bullish sentiment. The Relative Strength Index (RSI) also recovered from lower levels and is now holding steady at around 50 levels, indicating a balanced market sentiment.
The decline in India VIX, a measure of market volatility, enhanced the bulls resulting in a positive market outlook.
Looking ahead, major support for the Nifty is expected around the 21,800 level while resistance is seen around 22,350 for the upcoming week. The specific performance in stocks will play a crucial role in driving the market’s direction in the coming days.