Why Silver Price is Rising

Unless you've been out of touch with the financial news recently, you would be aware of the stunning rise in gold and silver prices.

Precious metal prices are on a roll in global markets. In India, gold and silver prices are at their record highs at around Rs 72,200 and 84,700, respectively.

This rise has grabbed headlines in India and triggered discussions about the next direction of prices. Will the bull market continue or will prices fall?

We recently published an article about when gold prices could fall.

In this article we will discuss the price of silver and its prospects going forward.

The Rise in Silver

The main reasons for the rise in silver, along with other precious metals, are ongoing geopolitical tensions, the recent spike in Israel-Iran tensions, expectations of a rate cut by the US Fed, stubbornly high inflation, central bank purchases, and speculative trading.

Let's dive into these reasons.

#1 Geopolitical Tensions

The recent uptick in geopolitical tensions has caused a stir in financial markets when Iran threatened a retaliatory strike against Israel following the attack on their embassy compound in Syria.

Global markets are not so much concerned about this retaliation as it is about any kind of escalation in tensions between the two nations that might follow.

The Middle East is a volatile place as far as geopolitics is concerned. Any flare up in tensions there tends to send the prices of oil and precious metals soaring. This time has been no different.

#2 US Rate Cuts

Then there is the ongoing debate about when the US Fed will start the interest rate reduction cycle. The latest estimate is a 50-50 chance of the first cut happening in June.

This is bullish for precious metals because lower interest rates stimulate demand which in turn causes a rise in inflation along with an improvement in economic growth.

This scenario extremely positive for silver because it acts as an inflation hedge (though not as good as gold) and is also a particularly important industrial metal.

#3 Persistent Inflation

The sticky nature of inflation in the US is also supporting prices of precious metals including silver.

Financial markets have come to accept the persistent nature of inflation. This has caused a rise in interest for investments in gold and silver.

This interest is not limited to retail investors and financial institutions. Even central banks have responded to this new reality.

This brings us to the next reason...

#4 Central Bank Purchases

Recently, central banks including the RBI have increased their gold holdings with additional purchases.

This trend has been going on for quite some time. This activity provides proof to the market that the big money/smart money is bullish on gold and by extension, silver.

Financial markets view silver as a high beta investment with respect to gold. Thus, if gold rises by a certain amount, silver is expected to rise more and vice versa.

Central bank purchases only add fuel to the fire as far as the silver bulls are concerned.

#5 Speculation

And then there is good old-fashioned speculation.

Most traders who are betting on silver aren't doing so because of any fundamental reasons. They're bullish on the white metal because they think its price will go up further.

In other words, silver prices are rising because traders think it will or should rise. Their speculative bets are driving the price of silver higher.

This is a highly risky activity best suited to professional traders. Retail traders/investors should ideally refrain from this activity.

What Happens Next?

Well, in the short term, the price of silver does look bullish.

However, investments in silver for the long term are best made either when the price is falling or in a slump. Long-term investors would do well to remember this.

Beyond the short term, the outlook is less clear. There is talk of silver 100,000 as the next price target.

Now we're not saying that the price of silver won't go to Rs 100,000 per kg in the short term. But it's important to note that such a speculative run up in price could end in a crash. This happens to the silver price regularly.

Gold is more stable when it comes to price volatility, but silver can move sharply in either direction. keep this in mind if the recent run up in price has tempted you to trade in silver.

Having said this, we acknowledge that the long-term fundamentals of silver are strong.

Conclusion

It makes sense for retail investors to hold some silver in a long-term portfolio, but it doesn't make much sense to speculate on short-term price movements.

Also, while considering an investment in silver look beyond 2024. Just because the price of silver is going up right now, doesn't automatically make silver a great short-term investment.

The long-term fundamentals of silver are strong but it's more volatile than gold. Do your due diligence.

If you're interested in adding silver to your investment portfolio, this editorial will be helpful: How to Invest in Silver in India.

Also check out Equitymaster's YouTube playlist on silver.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...