Silver dealers face overstocking fears as investment demand dries up after 40% price fall

Kolkata: Silver refiners and bullion dealers face surging stockpiles as fresh investment demand for the precious metal has dried up, even as prices have fallen more than 40% since scaling a peak of more than ₹4 lakh per kg in January amid uncertainty surrounding a US-Iran war breakthrough and fears of a weak industrial demand.

On Tuesday, silver traded at ₹2.35 lakh per kg in the Mumbai spot market.

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The decline in investment demand is visible across silver exchange-traded funds (ETFs), bars and coins, with investors who entered the market at higher levels now saddled with steep losses, according to traders and analysts. This has turned investors cautious about fresh purchases despite the sharp correction, they said.

"Investment demand for silver ETFs, bars and coins has come down. Internationally, prices are unlikely to cross $100 per troy ounce immediately unless the US-Iran war comes to an end. Silver prices are undervalued," said Chirag Sheth, global business head, Public Gold Bullion (SG) Pte. "The continuous war between US and Iran has impacted the solar industry, semiconductor industry and EV industry where silver is used."

Falling demand is causing inventory overstock for domestic traders. Indian bullion dealers and refiners have ordered about 2,000 tonnes of silver, which is currently being shipped, raising concerns about further accumulation of stocks, said people with knowledge of the matter. India imports about 7,000 tonnes of silver annually.

"With no new investors coming in and no immediate signs of prices going up, refiners and bullion dealers are facing a problem internationally as well as in domestic markets," said James Jose, president, Precious Metals Refiners Forum.

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The slide in silver prices over the past seven months follows an unprecedented rally, which saw prices surging more than 300% year-on-year and surpassing ₹4 lakh per kg on the Multi Commodity Exchange in January for the first time.

"Silver is still feeling the after-effects of the speculation-fuelled frenzy, which could be keeping investors on the sidelines after many of them suffered steep losses," said Carsten Menke, head, Next Generation Research, Julius Baer. Industrial demand is also expected to soften, adding another layer of pressure to the market. "A shift to cheaper alternatives, such as aluminium and copper, has started, and the growth outlook for Chinese solar module makers, which are the biggest industrial users of silver, is not as strong anymore," Menke said.

The persisting US-Iran war is further weighing on sentiment. A prolonged conflict could keep investors cautious, while expectations of softer industrial consumption could limit the scope for a quick recovery in prices.

For some long-term investors, however, the sharp correction has brought the metal back into focus as a potential diversification asset.

"The market has taken full cognisance of the marked decline in silver prices in recent days. Some investors have shaved off their allocation, while others have prepared for fresh acquisition depending on their views and goals," said Nilanjan Dey, partner, Wishlist Capital.

Investors with a horizon of five years or more could consider staggered buying through silver ETFs rather than making lump-sum investments, he said, suggesting regular monthly or fortnightly purchases to help average out the entry price.

For new investors seeking exposure to precious metals as a diversification from equities, ETFs could also be a route without having to manage physical silver. However, Dey cautioned that investors with a short holding horizon should not treat current lower prices as an automatic buying opportunity.