2018 to be the year of silver? White metal expected to outperform gold

Going by low volatility and rising risk in all other asset classes, the 2018 is expected to see a preference for precious metals. However, within gold and silver, the latter is expected to outperform the former.

Ratio traders are also looking at a fall in gold-to-silver ratio, which indicates how many ounce of silver can be bought with one ounce of gold. The ratio, 78.5 at present, is expected to fall significantly from here. This ratio falls when silver rises faster than gold, or gold falls faster than silver.

Since this year, according to the Silver Institute, “with equity and bonds in the expensive territory and Bitcoin’s stratospheric increase taking a breather during the beginning of 2018, we expect some investment to flow back into precious metals, benefitting silver bar and coin demand this year.”

Silver has a dual role – 60 per cent of the total silver produced is used for industrial purposes in the electrical & electronics segment and photovoltaic demand mostly for solar panels.

The demand is also expected to be bolstered by improving global economy. According to the International Monetary Fund (IMF), the world is projected to grow 3.9 per cent in 2018, against 3.7 per cent in 2017, and 3.2 per cent a year before.

The gold-silver ratio in the past two decades has sharply reversed from the level of around 80. The current level of 78.5, therefore, is seen on a higher side.

The Silver Institute notes: “We expect the silver price to experience a volatile ride. Short covering in the beginning of the year has already propelled the price above last year’s average. On a ratio with gold, silver has plenty of room to improve and migrate towards its long-term (20 years) average of around 64. With physical gold investment likely to be robust via risk-hedging, silver should benefit by proxy, given the propensity of professional speculators to leverage gold exposure through silver, and retail investors to buy silver instead of gold if they cannot afford the latter.”

The gold-silver ratio’s five-year average is also lower at 69.88. The 10-year average is 63.7 and 15-year at 62.5. More than that average price, silver has almost remained at the same level in the past few years, indicating a long period of consolidation.

"We also expect the average gold-silver ratio to move towards its long-term average, as we expect an outperformance by silver. Silver would benefit from a positive sentiment on gold. However, the higher beta of silver would lead to an outperformance,” said Chirag Sheth, research consultant (South Asia) at Metals Focus.

In the price-sensitive India market, consumers buy at low prices. As the prices are low, imports are also rising. “For India’s silver imports, 2017 was a strong year, with outward trade almost doubling from the previous year to 183 million ounces (about 5,700 tonnes).

The strong increase is on account of a combination of healthy jewellery demand and a shift from business conducted previously in cash to more formal channels. In 2018, we expect the silver demand from jewellery fabricators to remain strong, pushing imports to approximately 180 million oz, a little less than in 2017,” the institute says.