Silver has outperformed gold in 2024 so far and the historically high silver-to-gold ratio suggests further rally in the white metal. Growth in industrial demand for silver at more than twice the annual growth in its production also supports the rally
Silver prices are up 12.7 percent In the international market since the beginning of the current calendar year, slightly ahead of gold which is up 11.8 percent since January this year. Silver is currently trading at US$26.8 per ounce in the international market up from US$23.8 per ounce at the end of December 2023. In India, silver is currently trading at around Rs 81,000 per kilogram marginally higher than Rs 78,600/kg at the start of the 2024 calendar year.
The long-term price trajectory suggests that the last three years have been a washout for silver and despite the recent rally, silver prices in the international market are still about 10 percent lower than the $30/oz made in August 2020. In contrast, gold prices have scaled new highs almost every week in the last week. As a result, gold prices are now nearly 15 percent higher than their 2020s high.
The white metal has grossly underperformed the yellow metal over a longer time frame and is up just 12 percent since the start of the 2023 calendar year compared to the 26.5 percent rally in gold during the period.
This underperformance has opened up the possibility of a catch-up rally in silver as gold continues to rally despite challenging macroeconomic indicators such as a rise in the bond yields in the United States and an appreciation in the value of the US dollar index against major currencies such as Euro and the Japanese Yen.
The rally in silver is getting support from a sharp rise in the gold-to-silver ratio. Buying an ounce of gold now requires 86 ounces of silver, which is just a notch below previous high ratios of 90.
Silver prices tend in the last 10 years. Pic: 30Stades
Historically, there has always been a mean reversion in the ratio whenever the ratio has reached 90. The ratio was breached in February this year and silver has been out-performing gold since then. In the last 20 years, the gold-to-silver ratio has been 67 on average. The ratio had declined to 65 at the height of the post-pandemic rally in Silver in early 2021.
If there is mean reversion in the ratio now, then silver could outperform gold by up to 30 percent over the next few quarters. Investors should keep in that silver is a riskier bet compared to gold.
This is because silver prices are more volatile in the short to medium term than the yellow metal. This is partly due to a large industrial use of the white metal that volatility in its demand in line with the global industrial and trade cycle.
The bullish outlook on silver also rests on a growing industrial usage of silver unlike gold, which is largely an investment and hedging asset. Historically, photography was the biggest user industry for silver but the solar photovoltaic industry now accounts for nearly half of all industrial usage of silver and nearly 15 percent of all silver demand.
According to The Silver Institute, silver usage in solar photovoltaics was up 23 percent in 2022 and grew further by 15 per cent in 2023. Silver is also used in high technology and sensitive electronic devices such as mobile phones, computers, sensors, and electrical switches among others.
The institute is the international trade association of the silver industry. According to The Silver Institute, the industrial demand for silver is growing at more than twice the mine production of the metal. This has made the industry ever more reliant on recycling to meet the growing demand. This has created the potential for a silver squeeze and a resulting run-up in silver price if the demand stays strong for a few years in a row.
For Indian investors silver has an added advantage of being cheaper and easier to buy and store than gold. A fair quantity of silver can be stored at home, unlike gold which is mostly stored in bank lockers. Besides, there are few ownership restrictions on silver in India, unlike gold. This makes the white metal an attractive investment opportunity for investors in India.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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