4 Reasons Why Silver Price is Rising

It's said if gold is the emperor of commodities, silver is the empress.

Indians have been attracted to silver for centuries. When it comes to investing in silver, it is second only to gold in value and as a hedge against inflation.

Due to the varied uses of silver, it is a combination of an investment as well as an industrial commodity.

Most Indians are also long on silver, i.e., we own it in some form or another.

Thus we want to see the silver price go up, the higher the better.

So it should be no surprise that discussions about silver have increased recently. After all, the price of silver is at a multi-year high.

The price of the white metal has started the year with a bang. It has soared above Rs 75,000 per kg in the Indian market.

This is welcome news for most of us who own silver. But it also raises questions about the reasons behind the up move.

So why is the price of silver rising?

Here are the 4 main reasons...

• Long Term Bull Market

  The very first reason is structural in nature. While short-term triggers affect all commodity prices, silver has a long-term bullish trend supporting its price.

  The world is going 'all in' on solar energy to break the dependence on fossil fuels. To generate solar power, we need photovoltaic (PV) cells. Every PV cell contains silver. It can't do without it.

  Each cell may require a small amount of silver. But consider for a minute the number of solar mega projects that are underway all around the world right now...and in India too. There are many more projects in the pipeline in many countries.

  The demand for silver from this one application is likely to exceed several million troy ounces. 1 troy punce = 31.1 gm. And this will just make a small dent in the fossil fuel market.

  The amount of solar power needed to deal a big blow to fossil fuel use is so large that it will require several thousands of tonnes of silver over many decades.

  And that was just for solar power generation. There's also the Electric Vehicle (EV) boom.

  As per the latest figures publicly available, each EV needs about 55 gm of silver in it. This number will come down over time due to better efficiency but it's likely to stabilise over time somewhere close to 30 gm of silver per EV.

  This modest decline is nothing compared to the huge boom in EV sales. The sheer number of electric vehicles sold around the world will drive the demand for silver.

  EV manufacturers as well as the component makers want a steady and smooth supply of silver. Satisfying this demand is not a problem today but in the future, when global demand for EVs hits a certain level, silver will be available only at higher prices.

  And then there is the 5G revolution...

  5G will be a game changer for silver. The potential demand for silver the 5G will unleash is hard to imagine.

  Every smart phone has a small amount of silver in it. The more premium the phone, the more silver there is in it. This is a simple linear progression. There's nothing complicated about it.

  But 5G is different. The technologies that 5G will unleash will be unprecedented. Phones will look like very basic devices in the 5G world.

  We're taking about self-driving cars, smart homes filled with all kinds of smart devices, virtual reality (VR) and augmented reality (AR) applications like the metaverse, smart cities, and a lot more.

  We're very close to living a world driven by the Internet of Things (IoT). The IoT revolution will bring about a massive change in the way we live our lives. The number of devices we use will be a multiple of what we use today.

  All these devices will have silver in them. Smart appliances, VR headsets, automatic home lighting, air purifying systems, all this will be enabled by 5G. And without silver, this future won't be possible.

• US Fed's Monetary Policy

  Just like gold, silver is also a monetary asset. It used to be money before paper currencies became dominant. In this role, it follows the price of gold.

  Silver is sometimes called the poor man's gold. Just like gold, silver too is a monetary asset. It's just that it isn't used in this way anymore because gold is preferred. But during times on economic uncertainty, both gold and silver tend to rise together.

  As the US dollar is the world's reserve currency, the price of gold, and thus silver, is highly sensitive to anything that impacts the dollar. One of the most important elements affecting the dollar is the US central bank's monetary policy.

  The US Fed has been increasing interest rates to fight inflation. Initially, these rate hikes were steep but now, the Fed is hiking rates slowly, 0.25% at a time. There is wide consensus in global markets that the Fed will pause its rate hikes soon, perhaps as early as June this year.

  When interest rates were rising fast, the US dollar was strong. This is because the higher rates attracted a lot of capital to the US. Gold and silver tend to move inversely to the dollar. Thus they were subdued before the recent up move.

  But now, the situation is not so rosy for the dollar. With slower rate hikes and an expected pause, the dollar is not looking very attractive anymore.

  This has driven investors to gold and silver in large numbers. This trend is expected to continue in the near future. The price outlook for gold in 2023 looks promising. Thus the same should hold true for silver as well.

• Safe Haven Buying

  There are serious concerns about a recession in the developed world. Many economist and business leaders have predicted a recession to begin later this year in the US and Europe.

  Even if this doesn't happen, growth is expected to slow down. We can see the signs of this already. Job losses have picked up in the US. Initially, these cases were confined to the tech sector. Now however, we have heard news of layoffs in sectors too, McDonalds being the latest example.

  During times of economic uncertainty, people turn to save haven investments live gold and silver. The recent banking crisis in the US as well as the Credit Suisse fiasco, has brought this into sharp focus.

  Investors don't want to wait for the economy to get worse before taking positions in safe haven investments. They're pre-empting a downturn by betting big on gold and silver.

• Demand Recovery

  The biggest cyclical factor moving the silver price is the festive season demand and the marriage season in Asia. People in Asian countries have a higher attraction towards investing in silver as compared to their western counterparts.

  The marriage season in India begins around March/April. The season continues till Diwali in October/November. These months are typical buying points for Indian investors.

  This year there is also the China factor. Like Indians the Chinese too buy silver. They also buy higher amounts of silver as they're richer on average than Indians.

  However, due to harsh covid lockdown policies, they haven't been able to buy silver as they used to since 2020.

  These restrictions have now ended. The Chinese government has abandoned its 'zero covid' policy. The Chinese people have reverted to their previous consumption patterns. This includes their silver buying habits.

  Thus, the economic recovery in China has boosted silver demand in 2023 beyond the regular annual cyclicality in the white metal.

Conclusion

It makes sense to hold some silver in one's long term portfolio, but it doesn't make sense to speculate on short term price movements.

Also, while considering an investment in silver look beyond 2023. Just because the price of silver is going up this year, 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.

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...