A surprise U.S. rate cut, a record peak in gold prices, Chinese economic stimulus, and escalating tensions in the Middle East have bolstered the appeal of silver. Prices at the benchmark London spot market breached a 12-year high of $32.50 an ounce, while in the domestic futures market, it is well above Rs 93,500 per kg.
The recent 50 bp rate cut by the U.S. Federal Reserve is broadly supportive of bullion. The U.S. central bank lowered its rates to 4.75-5% for the first time in four years and hinted that more cuts are likely before the end of the year. Low interest rates for bank deposits and bonds have depreciated the value of the U.S. currency, prompting investors to rely on non-yielding safe assets like bullion.
Silver prices are generally inversely related to the value of the U.S. dollar, as the metal is denominated in U.S. dollars. If the dollar weakens, more silver can be purchased, which is likely to boost demand and thus the prices of the commodity.
Record high gold prices are also stimulating investor interest in silver. Gold and silver have a strong positive correlation. Both are considered precious metals and are often influenced by similar market factors. Due to this similarity, silver prices can exhibit similar price movements, with silver often following the trends of gold prices.
Gold prices have been on a bullish trajectory and are currently at lifetime highs in both domestic and overseas markets. The commodity gained about 30% in the key London spot market, while gains were limited to 20% in the Indian markets.
Escalating tensions in the Middle East and the Russian invasion of Ukraine have also supported bullion. The massive bombing in southern Lebanon has brought Israel and Hezbollah closer than ever to an all-out war. Likewise, Russia issued nuclear warnings to the West over strikes on Russia by Ukraine last week, raising demand optimism for safe assets.Bullion has a solid history as a crisis hedge due to its lack of credit risk and its negative correlation to risk assets. Investors turn to gold and silver during times of growing geopolitical tensions. When political or economic crisis deepen, investors become more risk-averse, fearing that conflicts could adversely affect financial markets and economies across the globe.China’s economic stimulus measures have also aided the metal. Last week, the Chinese central bank unveiled its biggest stimulus since the pandemic to pull the economy out of its deflationary funk and achieve the government’s growth target. The broader-than-expected package and interest rate cuts are likely to restore manufacturing activity in the country, thus increasing demand for silver.
Silver prices are influenced by both investment and industrial demand, but its industrial uses can create additional volatility in prices. Stronger industrial growth typically translates to higher demand for silver, as more than half of global silver consumption is used for industrial purposes.
Looking ahead, the ongoing momentum-driven buying is likely to continue in the immediate term, driven by a robust rally in gold. The lowering of interest rates, escalating geopolitical tensions, and enduring inflation concerns will help keep prices firm. However, China’s industrial demand will be crucial for extending the rally in the longer term.
(The author Hareesh V is Head of Commodities, Geojit Financial Services. Views are own)