Should you invest in silver at the current price levels?
As financial markets experience volatility, many investors wonder whether it is a good idea to move their capital to gold/silver/other asset classes at the current price levels. Gold & silver, as asset classes, have been used by investors across the globe to diversify the risk in their portfolios against economic and political uncertainties. Over the years, gold has outperformed silver as an asset class, giving superior returns. It is used as a measure of value, as an inflation hedge, to protect against unfavorable movements in the currency, and generally, as a safe asset class during uncertain times. Recently, silver has also witnessed increasing interest by the investor community and has seen some rally. The CPM group has recently published the silver yearbook for 2024 which provides in-depth research and insights into the outlook of the silver market
Here are a few interesting takeaways from the study:
Besides its use for diversification, the demand for silver is also driven by its increasing use in various high-growth industries. The demand for silver for fabrication is seeing an upward trend due to its growing use in solar panels, electric vehicles, and various electronic instruments. As these industries experience high periods of growth in the coming years, the breadth of demand for silver across sectors is also likely to widen. Demand for silver as jewelry has traditionally been driven by high demand in Asia and the Middle East. However, 2023 saw a degrowth in demand by jewelers, especially in India. The key reason was said to be higher inventory levels accumulated by the traders during 2022 when the prices were comparatively more favourable. The demand from solar panel manufacturers is likely to be around 20% of the total demand. However, the industry is facing some headwinds in China, where the government may disincentivize further manufacturing of solar panels due to existing oversupply.
While there is a consensus regarding an upward trend in demand for silver in the near to long term, the dynamics concerning supply are a bit more nuanced. There are three major sources of supply of silver. One is through new production from mines, which takes several years to become available. The other more readily available source of silver is from existing investors who had purchased silver at lower levels and looking to exit their positions due to the relative underperformance of the metal. This might restrict the sharp upward price movement driven by high demand. However, once this sell-off pressure is absorbed, the prices may see favorable movement. The third source of supply is the secondary market of scrap/recycling which accounts for ~18% of the total supply. Considering the overall demand and supply dynamics, the study suggests that the price of silver is likely to increase from $29 per ounce to $40 -42 per ounce by the end of this year or next year. In INR terms, this would mean moving up from INR 78,000 levels to crossing the INR 1 lakh mark per kg. Hence, an investor looking to invest at current levels is likely to see a return of almost 40-44% in their position over the short to medium term. This is subject to various headwinds and tailwinds playing out as expected.