Why silver is set to shine again: Risk hedging to create room for growth

A year ago, I highlighted the growing potential in silver and recommended here adding it to investment portfolios. Since then, silver has surged by more than 28% significantly outperforming the Nifty 50 - which has gained just 2.2% over the same period (from March 23, 2024). As we assess the current market dynamics, it is evident that silver is poised for another upward move in the near term.

Historically, gold and silver tend to move in tandem. However, over the past few months, gold has outperformed silver by approximately 8%, creating a divergence that suggests a potential reversal in favor of silver.

Tenure	Silver	Gold
6 Month	6.34%	14.65%
1 Year	41.19%	42.17%
5 Year	71.86%	75.75%

Further, silver is currently down about 9% from its all-time highs, while gold is just 2% below its peak, indicating room for silver to catch up and move further. The below ratio chart also indicates the same, as and when the spread between silver and gold is at its lowest point, the silver tends to bounce back and deliver superior returns then gold.

A refined analysis of silver's historical price movements across Stage 1 and Stage 2 indicates an initial 50% surge, followed by a consolidation phase before the next significant uptrend. At present, silver is in Stage 3, with an estimated upward potential of approximately 17% from the current levels.

Several macroeconomic and industrial factors reinforce silver’s potential:

With rising concerns over trade policies, such as Trump’s proposed tariff hikes, global markets are experiencing increased uncertainty. To hedge risks, several central banks have started diversifying their precious metal reserves beyond gold, accumulating silver, platinum, and palladium.

A recent example of this is Russia which has started diversifying into other precious metals as its reserves.

Silver’s industrial use is expanding, especially in green technologies. For instance, an internal combustion engine requires 14-18 grams of silver whereas an electric vehicle demands 30-40 grams. The same trend is visible in solar cells, space technology, and other advanced industries.

According to the World Silver Survey 2024, total supply of silver formed a plateau. From 829 million ounces in 2021 to 830.5 million ounces in 2023, and is forecasted to decline in 2024 to 823.5 million ounces. While the overall demand seems to have declined by 7%, on a closer look reveals that industrial demand increased by 11%. Creating a supply-demand imbalance which could push prices higher.

In continuation to the above, the below chart highlights growing supply deficits for key minerals critical to technology and energy transition. Especially silver, which is likely to face a severe shortage by 2030 by over 120% deficit.

Given the supply constraints, increasing industrial applications, and rising accumulation by central banks, silver stands to benefit more than gold. The current divergence in price movement, the anticipated reversal in the Silver/Gold ratio chart, and macroeconomic factors collectively set the stage for silver to outperform gold in the coming months.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)