Time to reduce excess exposure to silver

Just as different asset classes perform over different time periods, performance by components within the same asset class also varies. For example, silver has generated 61% returns in the past year compared to just 9% by gold. Due to this massive outperformance, the gold - silver ratio has crashed from a high of 124 on 18 March 2020 to 68. The ratio denotes the price of gold as a multiple of the price of silver. It is now close to a six-year low.So, what should bullion investors do now? This depends whether you are a long-, medium- or short-term investor. Since the phase of silver undervaluation is over, there is no need for long-term investors to take additional exposure to silver now. Long-term investors who had taken such a bet on silver in the past can also cut their exposure to neutral levels.Though the long-term trigger for silver’s undervaluation compared to gold is gone, there are several opportunities still left for short- to medium-term bullion investors. The bullion market is going through a phase of consolidation. Gold is expected to outperform silver in the short term (1-3 months) and silver is expected to outperform gold in the medium term (6-9 months). Let us consider the reasons behind this special situation.83058410Gold is expected to benefit in the near term due to various reasons and therefore, short-term investors should bet on gold more. First, the industrial metal rally has tapered off due to efforts by China to stabilise prices of global industrial metals. Since half of silver’s use is by industries, this will impact silver negatively along with other metals like zinc, copper, etc. However, gold will be spared this turmoil and outperform. Gold’s safe haven demand has also been going up of late. “The recent Chinese crackdown on crypto currencies has shaken investors and global disenchantment with crypto currencies is pushing investors into alternatives like gold,” says Praveen Singh, AVP, Fundamental Research – Commodities & Currencies, Sharekhan. The second covid wave has also helped gold. “Due to the covid wave, the US Fed is expected to take more time to increase rates and this will help gold to outperform silver over the next 1-3 months. However, I don’t think this ratio will go beyond 85 during this phase,” says Sugandha Sachdeva, VP – Commodities & Currency Research, Religare Broking.Once the short-term correction phase is over, silver is expected to continue with its outperformance and therefore, short term investors can shift back from gold to silver. The basic behavioural difference between gold and silver price movements is also a major reason for this. For example, silver and gold perform differently despite being precious metals and a close look at the long-term historical price charts will reveal this. “There will be some price action in gold every year. However, silver will remain in slumber for years and then jump up suddenly by 50-70% over 1-2 years before going back to sleep again for the next 4-6 years. Since this medium term silver jump will continue for the next 6-7 months (till end of 2021), silver is likely to outperform gold in 2021 also,” says Navneet Damani, VP – Commodities Research, Motilal Oswal Financial Services.While the 50% industrial use is a negative for the short-term, it becomes positive for silver in the medium-term. Though growth is still fragile, the global economy is now on a recovery path and this should favour silver and help it outperform on a yearly basis. “Silver fell along with other metals like copper, etc due to recent Chinese actions; but this is not going to last long. Global economic recovery will help silver in the medium term,” says Singh. “The Green initiative by US under Joe Biden and increased usage of silver in products like solar panels, etc are other long term positives for silver,” says Sachdeva.So, what can be the gold-silver ratio target for the medium term? Speculative markets rarely trade in fair zones and they usually move between two extremes. “Due to momentum favouring silver and its better potential in the medium-term, the gold -silver ratio will go down more in the medium term before coming back to its long-term average later,” says Singh. How much more can this ratio go down before reversing? “I expect the medium-term reversal of gold-silver ratio to happen around 60-62 levels,” says Damani.

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