Fundamentals suggest silver prices have room for further upside

After a brief pause, silver prices remained in the limelight followed by feeble US economic numbers, which fuelled hopes that the US Federal Reserve would cut interest rates this year.

In the key domestic futures market, prices were placed well above Rs 90,000 a kg level while it crossed the key $30-level mark in the overseas market last week.

A cooling labour market and softer retail sales suggest weak economic activity in the US. This has prompted investors to bet on bullion on expectations of a likely cut in interest rates by the end of the year. However, the US Federal Reserve may seek more proof of cooling inflation before the rate cut. A cut in rates would make non-yielding bullion more attractive.

Domestic silver hit an all-time high of Rs 96,493 a kg last month, gaining about 30% since the start of this year. Increased safe-haven demand amid rising geopolitical tensions, US rate cut hopes, speculative buying, and a sharp rally in industrial metals were the driving force behind the sharp rise in prices.

However, although the overseas silver prices gained considerably, the metal is trading far below its lifetime high of $49.51 an ounce touched in 2011.

The recent rally in other base metals prompted speculators to bet largely on this precious white metal. The unique industrial properties of silver made it an essential raw material for various industrial uses. More than half of silver produced across the globe nowadays is consumed in industrial areas.

A substantial rise in gold prices also had a positive influence on silver. Historically, silver and gold are both considered precious metals and are often influenced by similar market factors. Due to this similarity, both can exhibit similar price movements, with silver prices often following the trends of gold prices.

The bullion market has been largely influenced by uncertainty over US rate cuts in the past several months. Cutting interest rates may stimulate borrowing and spending by both consumers and businesses which may boost industrial growth. This could typically translate to higher demand for metals causing an upbeat sentient on prices.

The Russia-Ukraine war continues without an end in sight or with no sign of de-escalation and the Israel-Hamas war in Gaza remains supportive for bullion. Like gold, silver is also considered a safe investment, meaning that investors tend to flock to it in times of economic and political uncertainty.

Domestic silver largely succumbed to high price volatility. During 2003, the average price of silver in the Indian market was below Rs 10,000 a kg but it skyrocketed to Rs 73,000 levels by 2011.

In the next eight years, prices were rather steady, but since 2020 it regained momentum. Volatile overseas prices, demand-supply dynamics, and weakness in the Indian rupee pondered the sentiment of the metal during the period.

Looking ahead, growing worries about geopolitical tensions, the prospect of China industrial demand, a robust rally in gold prices, and Fed policy uncertainty continue to offer support to prices.

On the trading side, as long as prices stay above Rs 85,000 the ongoing momentum may target one lakh per kg in MCX futures. However, it is unlikely for a major downside unless breaking the stiff support of Rs 75,000.