Silver, which rose at more than twice the rate of gold last year, continues to outperform its more lustrous peer, and in the process, has narrowed its gap with gold, or the gold-silver ratio. The ratio, which was 80 a year ago, has since halved and experts feel it could come down further, implying one may be better off buying silver than gold. In the calendar year to date, silver has yielded a 17% return compared with gold which has gained a meagre one-fifth of a per cent since January. While the ratio is an indicator of how prices have moved over time, analysts say it is only one of the several factors which should be considered while taking an investment decision.
"There is still a lot of interest in silver," said Rajan Venkatesh, MD, bullion, ScotiaMocatta, a division of Scotiabank, the largest seller of precious metals among banks in India. "There is a strong possibility that, as a defensive investment option, the prices of silver may go up further from this level because of volatility in many economies globally. Gold will also rise but it may not see the same upside as silver." Precious metals have had a good run in the wake of lingering uncertainty over the longevity of economic recovery. While the emerging markets, notably India, China and Brazil, recovered rapidly from the economic slowdown, fears of a double-dip recession hung over most developed countries for much of last year.
The worries have receded in the US following the second round of quantitative easing — the decision by Federal Reserve to drive down interest rates by buying bonds — and extension of Bush tax cuts resulting in most economists upping growth estimates to 4-4.5% in 2011. But much of Europe and Japan remain mired in uncertainty, and even in the US, fears of inflation stoked by the expansion in money supply have caused some to turn to precious metals. The price for an ounce (31.10 gms) of silver stood at $35.91 last Friday while that of gold was $1417.5. Last year, gold yielded a return of 23% while silver prices shot up more than twice that level. Analysts feel that with rising prices, demand for gold, which is perceived as a quasi currency, may slow but that of silver is unlikely to because apart from being a precious metal, it also has industrial uses. "The price appreciation in silver has created a short-term opportunity, over a quarter, wherein money could be made by buying silver and selling gold with the ratio narrowing further," said Sonam Udasi, head of research, IDBI Capital. However, experts caution that investors should trade such strategies only under the expert guidance of brokers.
Agency data show that in 2009, global industrial demand for silver was 48% against jewellery demand of 21%. Also, with gold becoming costlier, silver is being perceived as an alternate investment option and commodity funds are moving money into it. "The ratio must not be viewed as the sole factor in a person's decision of whether to buy silver or to sell gold, or even the other way round," said Jayant Manglik, president, Reliagare Commodities. "The ratio plainly indicates that silver is overvalued but nobody can tell when it arrives at its normal level of 55-60." The gold-silver ratio is simply how many more times expensive gold is to silver — a higher ratio indicates that silver is undervalued while a lower ratio means that silver is overvalued and could correct.
According to Religare Commodities, India is the largest consumer of silver in the world and 2010 was a banner year with imports increasing by 25% over the previous year to touch 1,200 tonnes. Along with domestic mining and recycling, the annual traded number is closer to 4,000 tonne. This uptrend in demand is likely to continue with increasing affluence, awareness about portfolio diversification and industrial demand. Almost 60% of silver is used as jewellery followed by about 25% in investment and coins. The rest 15% goes into industrial applications like metallurgy and electronics applications. Expert traders on overseas markets normally take positions on the Comex division of New York Mercantile Exchange (Nymex), while back home exchanges such as MCX, the leader in non-farm products' futures, and NCDEX offer futures platforms to actual users and speculators. The prices of gold and silver on local futures markets reflect the overseas price movements adjusting for dollar-rupee fluctuation. Since India is a leading importer of gold, consuming around 700 tonne annually, a rise in the rupee makes gold cheaper and a fall makes it dearer. If gold has risen on the overseas market, the local price may cap the rise if the rupee strengthens against the dollar. However, a fall in the rupee could make gold costlier than on the overseas market.
