Factors Affecting Silver Rates in India
There are a lot of factors at play that impact silver prices in India. Even though silver rates have shown a steady increase over the last two decades, the historical trends should not be taken as a benchmark when considering future price volatility. Investment in silver as a commodity has gained steam in the country, and investors need to factor in various variables if they are to make decent profits from silver in the short/long run.
- Large investors: The silver market is much smaller than the gold market. As such, large investors or traders can potentially influence silver prices. A point in case here is Warren Buffet buying 130 million troy ounces of silver in 1997 at $4.50/ounce, which impacted market prices.
- Oil prices: Mining of silver is an energy-intensive process, and so silver prices are correlated with oil prices, the primary energy source in today's world. Also, imported silver requires a strong logistics platform backed by consistent oil supply. Volatility in oil prices cause dynamic prices of both gold and silver.
- Industrial demand: As India moves towards greater industrialization, the need for silver as an industrial commodity has seen a spike in recent times. This is touted to drive silver prices in the near future and beyond.
- Import duties: As silver is primarily imported in India, silver rates are directly affected by the import duty applicable on imports. A higher import duty translates to higher silver prices in India.
- US Dollar fluctuation: Silver prices are inversely affected by the USD Index. This means that a strengthening USD can decrease silver rates in India, while a weakening Dollar signals increasing silver prices.
- Gold prices: In general, silver prices follow the upward/downward trend of gold closely. If there is a spike in demand for gold leading to increase in its price, silver will follow suit. Similarly, any decrease in gold prices will see a greater decrease in silver prices.
- Trade deficits: The greater the amount of imported commodities, the more will be a country's trade deficit. As the trade deficit increases, the government may take step in to take counteractive steps to curb import of commodities, such as it did in the last couple of years to rein in gold imports.
- Inflation: As commodities like gold and silver are preferred choices of customers to hedge their funds in times of financial stress owing to inflation, prices of silver tend to increase when inflation is high.
- Large Concentrated Short Position:3 or 4 of the largest silver traders currently hold 90% of all short silver contracts. This sort of concentration of a publicly traded commodity in the hands of few can have significant implications on prices of silver in the short and long run.
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1. BNP Paribas Long Term Equity Fund
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