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According to Motilal Oswal financial Services Quarterly report on Silver, With over 30% gains in recent months, likely to see some profit booking at certain intervals, however any major dips could be used as an buying opportunity. Important support is near ?86,000-86,500; while MOFSL revises targets higher from Rs.1,00,000 to Rs.1,25,000 on domestic front and $40 on Comex, from a 12-15 month perspective. Buying on dips is recommended for Silver.

Inflation and Growth

Central Banks (CB’s) around the globe have been in limelight since past few years. Inflation has been under scrutiny ever since it went up in 2021. Post QE in 2020, inflation of major economies had reached near double digits. To calm these inflationary pressures, major CB’s have raised interest rates by ~1600bps since 2022. Fed announced QT measures to reduce their already bloated balance sheet. Amidst these measures, inflation pressures eased off significantly. Even after spike in rates, no major economic impact was seen on economies.  Recent economic numbers have started to show sign of weakness. ECB recently announced a hawkish cut of 25bps, further updates will be important to watch for. However, IMF’s recent report showed steady growth trajectory in 2024 and 2025 US GDP was also reported recently at 1.4%. It will now be important for the Fed to strike a balance between Inflation and Growth

Major Central Banks Action

US central bank raised rates from 0% to ~5% in a year and is now steady. In 2024, Fed has not announced any change in interest rate yet. As inflationary concerns dropped market participants are bracing for rate cut. Policymakers on other hand, want the inflation to reach around their target of 2%, Fed has announced reduction in the pace of their QT. Governor Powell has mentioned that either fall in inflation or slowdown in growth could ignite the rate cut cycle. From bets of around 3-4 rate cut at the start 2024, we are down to just one. Interest rate probabilities has played a crucial role this year.The rate cut probability has shifted from March to May to July to now Sep’24 supporting an up-move in precious metals. Sharp difference in what the market is pricing and Fed’s action is really intriguing. CME Fed watch tool suggests, market is pricing ~70% chance for a rate cut in September Fed meeting.

China and its impact on Silver (Precious + Industrial metal)

China is one of the largest consumer and producers of several industrial metals. Hence, any major move in industrial metal also triggers a move in Silver. It was one of the only economy to have had a three year lockdown during pandemic. Amidst this extended shutdown, economic activities had come to bare minimum. Property sector which was under distress earlier, fell further into the hole. China property investments fell by ~10% in first half of 2024, despite drop in prices. Lack of FDI and slower growth increased pressure in other sectors as well. On positive side, market participants are hopeful for a liquidity push by PBoC. Chinese inflation is near 0% so, the central bank has lot of room to cut rates. Chinese equity market have reversed significantly - crude, copper and gold imports are also quite high giving some confidence of the freshly brewing China story.

Geo- Political Tension

Panic, distress or black swan events are supportive for safe haven assets. Since 2022, i.e. Russia invaded Ukraine the risk premium in the market have been elevated. Be it trade tensions in 2019, Russia-Ukraine 2022, Israel-Hamas 2023, all geopolitical tensions are still active and providing jerks to market from side-lines. Being an election year in the US, economic uncertainty could also boost safe haven appeal for Silver. Before US elections, all efforts are towards a possible ceasefire – an ease off in the current tensions. However, Israel continues to attack borders of Gaza and increasing tensions in the Middle East. There are also updates regarding possible tensions between China and Taiwan. To top it up, if possibility of former President Trump wining increases, we could once again see a spike in volatility. It is safe to say that Geo-political tensions have helped precious metal pack to keep shifting its range higher.

Silver Demand & Supply

Some interesting Silver demand numbers from Silver institute forecast report. Total Demand is expected to grow by ~2% from 2023 to 2024. Total Demand in 2024 is expected to be ~1219 tonnes, while 2022 demand was ~1279 tonnes. Industrial Demand is expected be at the highest @ ~710.9 tonnes. Industrial Demand is expected to grow by ~8.5% since 2023 and ~40% since pandemic. Jewellery and silverware is expected to increase by ~4.5%. Net physical and photography demand are expected to fall.

According to Manav Modi, Senior Analyst – Commodity Research at Motilal Oswal Financial Services Ltd, “Total Supply is expected to fall by ~1% from 2023 to 2024 whilst the total supply in 2024 is expected to be approximately 1004 tonnes, which is similar to the level observed in 2021. Mine production is expected to decrease by 1% from the previous year to 823.5 tonnes in 2024. This decrease is attributed to challenges in mining operations leading to increased supply constraints.

Interestingly, life time high prices at domestic front seem unfavourable in terms of recycling which indicates that the incentives for recycling are not strong enough to significantly increase supply. Demand for silver is projected to exceed its supply for the fourth consecutive year in 2024. This suggests that the market balance for silver will remain in deficit, contributing to potentially higher prices as demand outpaces supply. Overall, these factors indicate a challenging supply situation for silver in 2024, with production constraints from mining and ongoing deficits in market balance driving the market dynamics.”

Conclusion

Silver moves away from the slow mover tag, having moved swift and steadily for this year After a steady start, silver has gained by ~30% YTD. It looks set to win the gold – silver race, despite wearing rabbit shoes.  Ambiguity regarding Fed interest rate cuts this year has kept investors on edge and in a recent Fed meeting, interest rates were kept unchanged. The Dot plot showed only 1 rate cut in 2024, down from 3 signalled in March. Fed officials now await further evidence of easing inflation. Weak US Economic data from the US are supporting precious metals. Probability for a rate cut is at 70% for September Fed meeting.  Geo-political tensions have also been providing jerks to market from side-lines.  Domestic import in 2024 has also increased significantly, up by ~4000 tonnes.  ETF flows are modest, but speculative buying has cushioned prices. Silver institute suggests that market balance for silver could remain in deficit. Positive signals from China on economic growth or industrial demand could further support prices.

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