QE tapering: US continues to impact gold, silver prices

The concerns over tapering of QE by the US continues to impact gold prices, and consequently, those of silver.

By Naveen Mathur, ET Bureau | Updated: Oct 14, 2013, 08.22 AM IST

QE tapering: US continues to impact gold, silver prices

With applications ranging from industrial use and jewellery to silverware, photography and investment, silver is an essential commodity. A quick break-up shows that industrial demand accounts for 44%, followed by consumption in jewellery and silverware at 22%, investment demand at almost 30%, while photography accounts for a little more than 5%.

Since the metal is used for a variety of industrial purposes, the factors impacting its price are also numerous. Starting with its applicability as a precious metal, it is seen that it takes major cues from the price movements in gold. In case of its usage in industrial applications, base metals also provide direction to silver prices. Other than these, major economic indicators with respect to manufacturing from top countries like the US, the UK, China, Eurozone and Japan provide further direction to prices. As for facts on the consumption front within the industrial metals category, in 2012, the US stood as the top consumer in this space, followed by China, Japan and India.

In the silver jewellery segment, China tops the charts as it was the top consumer in 2012, followed by India, Thailand and Italy. In the case of demand for silver coins and medals, the US is the top consumer, with the other top players being Canada, China and Austria. In the space of photography for 2012, the Eurozone occupied the top consumption slot, with the US, Japan and China following it.

Among the top silver miners, Mexico’s share stands at 21%, China’s at 15%, Peru at 14%, and Australia’s contribution is at a little above 7%. Russia, Poland and Bolivia account for more than 5% of silver mine production, and Chile and the US account for more than 4% each.

Price performance

From approximately $30/oz at the start of the year, spot Silver prices have slipped to around $21/oz now. While several factors have affected this downside movement in prices, the primary among these is the loss of gold’s status as a safe haven amid the dev elopments regarding the tapering of quantitative easing by the US. This, in turn, has led to the pressure on silver prices.

The precious metals literally lost their sheen due to the expectations that the Federal Reserve would begin its pullback of the stimulus measures. The ETF holdings of silver witnessed a sharp contraction during the price correction, but since August, a reversal in the ETF holdings has been seen. While the worst seems to be over as the ETF holdings of precious metals in the US show a stable trend, the concerns with respect to the tapering of quantitative easing still remain. When the decision by the Federal Reserve is enforced, the markets are likely to react immediately with a negative bias towards gold, and eventually, this will impact the silver prices. This is the major factor that has restricted a sharp rally in silver prices despite the rising trend in the ETF space.

It is evident from the adjacent chart that since July the silver holdings in the iShares Silver Trust have witnessed a rising trend. However, the average price has risen only at a moderate pace as various factors impact it. From the precious metal point of view, the increasing ETF holdings are seen to be a positive, whereas from the industrial metal perspective, silver is reacting to the slowdown in the emerging economies, which, in turn, could affect the demand for silver as an industrial metal, eventually leading to restricted price gain.

During the various price corrections this year, it was also seen that the currency factor played a crucial role in determining the prices. With expectations of QE tapering, the dollar index had strengthened and put further pressure on prices in dollar terms. On the other hand, the rupee witnessed depreciation and this prevented sharp losses in the Indian markets.

Not making enough money in stocks? Click here for real-life stories of successful investors.

Too busy to trade in stocks? Invest in Mutual Funds with ET Money!