Silver prices are again in discussion, per kg Rs. 1 lakh ready to test

A surprise drop in US rates, a record peak in gold prices, Chinese economic stimulus and rising tensions in the Middle East have boosted silver prices. Prices in the benchmark London spot market touched a 12-year high of $32.50 an ounce, while in the local futures market it settled at Rs. 93,500 is above.

The recent 50 bp rate cut by the US Federal Reserve has broadly supported bullion. The US central bank cut its rates to 4.75-5% for the first time in four years and signaled that further cuts are likely before the end of the year. Low interest rates for bank deposits and bonds have reduced the value of the US currency, prompting investors to rely on non-yielding safe assets such as bullion.

Silver prices are generally inversely related to the value of the US dollar, as the metal is denominated in US dollars. If the dollar weakens, more silver may be bought, which is likely to increase demand and thus increase the price of the commodity.

Record high gold prices are also fueling investor interest in silver. Gold and silver have a strong positive correlation. Both are considered precious metals and are often affected by the same market factors. Because of this similarity, silver prices can exhibit similar price movements, with silver often following the price trends of gold.

Gold prices are on a bullish path and are currently at lifetime highs in the domestic and foreign markets. The commodity rose around 30% in London’s main spot market, while gains in Indian markets were limited to 20%.

Rising tensions in the Middle East and the Russian invasion of Ukraine have also supported bullion. Massive bombings in southern Lebanon have brought Israel and Hezbollah closer than ever to all-out war. Likewise, Russia last week issued nuclear warnings to the West over a strike on Russia by Ukraine, boosting demand for safe haven assets.

Bullion has a solid history as a crisis hedge due to its lack of credit risk and its negative correlation with risk assets. Investors turn to gold and silver in times of rising geopolitical tensions. When a political or economic crisis deepens, investors become more risk-averse, fearing that the conflict could adversely affect financial markets and economies around the world.

China’s economic stimulus measures have also helped the metal. Last week, the Chinese central bank unveiled its biggest post-pandemic stimulus to lift the economy out of its deflationary funk and hit the government’s growth target. A broader-than-expected package and interest rate cuts are likely to restore manufacturing activity in the country, thus boosting demand for silver.

Silver prices are influenced by both investment and industrial demand, but its industrial use can cause additional price volatility. Strong industrial growth generally translates into higher demand for silver, as more than half of global silver consumption is used for industrial purposes.

Looking ahead, the ongoing momentum-based buying is likely to continue in the immediate term due to the strong rally in gold. Lower interest rates, rising geopolitical tensions and inflationary concerns will help keep prices stable. However, Chinese industrial demand will be crucial to extend the rally in the long run.

(Author Haresh V is Head of Commodities at Geojit Financial Services. Views are his own)