By Dr. Renisha Chainani, Head Research, Augmont – Gold for All

After eight months of downward momentum, now finally silver has started its bull run in the last week of November. A bull run is defined as a period of time where the majority of investors are buying, demand outweighs supply, market confidence is at a high, and prices are rising. After touching the low of Rs 52500 in the first week of September, silver prices have recovered almost 20% from their low. Let’s study what are the reasons for the fuel in this rally that will take prices much higher:

Reasons for bull rally in Silver:

1. Silver Imports in India

According to the most recent trade data, imports of all types of silver are reverting to more normal levels following the major disruption caused by COVID in 2020-21. Before the epidemic, India imported 5,700 tonnes of silver per year on average (since 2012). Imports of all types of silver totalled 5,970 tonnes in 2019 but decreased by 63% to 2,220 tonnes after lockdowns and limitations were enacted in 2020. Local purchases in India were approximately 4,500 tonnes last year but may exceed 10,000 tonnes this year. Last year, imports remained low, notably for bars and other unwrought metal. However, silver consumption in India is seeing a rebound in 2022 and is having an impact on its price. Local silver prices in India currently have a higher premium than global silver prices, indicating robust demand at existing levels. It is anticipated that imports will grow further in the December quarter due to festival and wedding season demand, putting a floor under prices.

2. Restocking by Wholesalers

Global consumption of the white metal is expected to hit a new all-time high in 2022, driven by post-pandemic industrial and physical investment demand. The lifting of lockdowns in India, as well as the introduction of domestic silver-backed ETFs, has resulted in a significant resurgence in demand. According to August import figures, domestic silver jewellery manufacturing may be increasing. Semi-manufactured silver import volumes are 7.5 times higher than pre-pandemic levels, accounting for 47 per cent of overall imports year to year, compared to just 7 per cent in 2019. Wholesalers and fabricators may have restocked in August as prices fell to a more than two-year low by the beginning of September. A weaker rupee, on the other hand, may serve to boost the local silver price, resulting in lesser imports in October. Moreover, in 2022, an implied demand for bars is expected to return to 2018 levels. The expedited purchases depleted the London vaults to 27,101 tonnes at the end of September, the lowest level since records began in 2016.

3. Geopolitical landscape

Lower gold and silver prices are normally supported by lower interest rates and currency values, but 2022 is anything but usual. Inflation is at its highest level in four decades, and Ukraine is involved in the first major European conflict since WWII. The geopolitical breach between the world’s nuclear powers has raised the possibility of the conflict expanding beyond Ukraine’s borders. China has not been bashful about its plans for Asian reunification with Taiwan, while North Korea has increased its missile tests. The global scene has grown perilous, with China, Russia, and their friends on one side and the United States, Europe, Japan, and their allies on the other. The dollar’s role as the world’s reserve currency is jeopardised as a result of the split.

4. Gold-Silver Ratio

The silver-gold ratio is currently near the short-term midpoint of 80:1, but it remains above the long-term normal level of 60-70 ounces of silver for every ounce of gold. A rising ratio often indicates lower gold and silver prices, but a fall in the statistic has historically been positive. Keep an eye on the ratio for hints as gold and silver confront opposing pressures from interest rates and the US dollar on the one hand, and the geopolitical landscape on the other. The ratio’s recent movement tells us not to be overly bearish in the current climate.

5. Silver Open Interest at a 12-year low

Open Interest on silver is below August of 2010 when Silver moved from $18 to $50 an ounce in 9 months. The big shorts that have been stopping the price of silver from going up have covered their shorts and they are out of the market now.

6. Hawkish tone of FED

The hawkish tone went against minutes from the Fed’s last meeting, which signalled that policymakers agreed that there were concerns about the economy’s health and that it would be appropriate to slow the pace of rate hikes. FED chairman reinforced his message that, while the rate hike pace is likely to moderate, the FED will require a tight policy for “some time” – aka “higher for longer.” As a result, the 10-year US Treasury bond yield fell roughly 4%, providing additional support to the inversely correlated precious metals

7. Supply Deficit

According to the Silver Institute, mine production will likely increase by 2 per cent this year to 843.3 million ounces (moz) against 822.6 moz last year. However, demand, including for industry, jewellery and investments, is projected to be five per cent higher this year at 1,101.8 moz (1,049 moz in 2021).

This leaves the market balance staring at a 71.5 moz deficit, a 38 per cent rise from 2021 when it was 51.8 moz. If investments are taken out of the calculations, then the net market balance will be a deficit of 96.5 moz against 116.7 moz a year ago.

Way Forward

Silver prices had been trading in the range of Rs $18 (~54000/kg) to $22 (~Rs 63000/kg) for the last six months. Owing to stronger demand and the reasons discussed above, we have seen prices breaking this range last week. Buying is advised in Silver on dips around Rs 63000-63500 for the target of Rs 70000/kg, Rs 72000/kg and Rs 75000/kg in the coming few months.

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