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What drives silver prices

Silver’s increasing industrial demand has helped its price rise at a faster rate than gold.

As a long-term investment, silver has delivered even more stellar returns than gold. The return on silver over three, ten and twenty years’ time frame has been higher than gold.

Yet, silver lagged gold in the fiscal year ended March 2012, managing only a 0.1 per cent gain while gold vaulted 33 per cent in rupee terms.

The slowdown in silver price gains recently is explained by three factors. For one, silver’s fundamentals are linked more closely to growth in the global economy because it is being used increasingly as an industrial metal.

Two, gold is more established as a ‘haven’ investment than silver. And three, silver’s relationship with industrial metals is getting stronger.

INDUSTRIAL USE

It starts with the fundamentals. While only 11 per cent of gold finds use in industrial activity at the global level, 48 per cent of the annual silver production goes into industrial applications (as cathode in batteries, conductors in electric switches and consumer electronics, coating material for optical data storage devices, in photo voltaic cells).

The industrial demand for the white metal is estimated to increase further in the coming years with its newer applications in wood preservatives, super conductors.

Silverware and silver jewellery together accounted for a third of the white metal’s supply in 2001.

This had fallen to a fifth by 2011. In contrast, the quantum of silver used for industrial applications (excluding photography) has risen to 48 per cent from 39 per cent.

What this change in composition of demand means for silver investors is that their returns from the metal may rely more on factors such as buoyant economic growth and rising industrial production than in the past.

On the other hand, gold’s foremost usage is still in the form of jewellery with 48 per cent of gold consumed as jewellery.

Thomson Reuters GFMS, an independent global researcher of precious metals, has estimated that industrial demand will make up 60 per cent of silver’s overall demand by 2015. This takes into account increase in demand in already established end-uses as well as recent applications of silver.

Therefore, there is a lower ‘discretionary’ component to silver purchases than is the case with gold.

What this means is that silver prices may deliver steadier gains for investors than gold, provided the global economy picks up once again.

INVESTMENT DEMAND

If gold’s price has managed gains for more than nine consecutive years, this is mainly because of the rising investment interest in the metal.

Today as much as 41 per cent of the global demand for gold comes from investors.

In the case of silver, though investment demand is rising, it is still not as high as that for gold.

Silver ETFs make up 17 per cent of overall demand now (nil in 2001). Coins and bars contribute to 10 per cent of overall demand for silver now, rising from 3 per cent in 2001.

The proportion of demand that comes from investments has a bearing on the price action.

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Posted by on Apr 16 2012. Filed under Silver Analysis. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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