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Business / Finance

Silver is not far off. Is it worth investing, how and for how long themes of the day 15.07.2020 at 22:12

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The Protective properties of the gold fade with each new growth of quotations. Analysts are increasingly paying attention to silver. But upon closer inspection it is not all so simple.

on July 13, the price of a Troy ounce of silver made new high since September of last year (19.31 USD) and continued moving upward, reaching at auction on July 14, the mark of 19.72 USD. During the month the asset went up 10.7%. Over the same period, the main competitor – gold – grew by 4.9%. The values from the beginning, the gap in favour of gold, which against the background of the search for investors "safe haven" during a pandemic increased by 19% (against 7,5% in silver).

Precious metals are rising for obvious reasons. The main driver of the widespread uncertainty – will the second wave of the epidemic of the coronavirus? Will agree on whether Beijing and Washington? What will be the pace of global economic recovery? All these issues are worrying investors, forcing them to make a choice in favour of defensive assets, which include precious metals.

Until recently the beneficiary of this dynamic was only gold. But its growth is slowing (for comparison: in April it grew by 6.6%), and popularity can surely be considered excessive. According to forecasts, gold will continue to rise, but it will not be so pleasant for investors dynamics: a further range is estimated at 1 800-2 000 dollars per ounce at the current price of 1 813 USD. In other words, it appears that gold investors are fed up and are ready to move on to another precious metal. Than, for example, silver is worse? Maybe it's ready for growth?


Factor 1: industry

Silver is widely used in industry, for example, in electronics and electrical engineering, the chemical industry, manufacturing of batteries, including solar, rocketry and medicine. During a pandemic, the global industry has experienced tremendous stress, but now the recovery is in full swing, and the Outlook is generally positive.

Factor 2: spread of gold

Economist and Professor of Economics Eugene Kogan recently drew attention to the impressive spread between the price of gold and silver, noting that, given a picture, "may turn silver not far off." Gold is at very high levels, while silver appears to be undervalued, that is, it is waiting for a game of "catch-up". "The fact remains – behind the growth of silver prices relative to growth in the price of gold begins to decline. Closer to me the postulate that silver is undervalued to gold as lagged behind in growth," — says the expert.

agrees With his colleague Eugene Mironyuk (IR "freedom Finance"), emphasizing that the quotations of precious metals is always better to follow through their relationship: "In recent years this ratio when comparing silver and gold decreased to less than 1:100, while in may it reached the record of 1:120. It talked about the serious growth potential of silver prices, given its relevance in industry and jewelry industry, no less than gold. The catalyst for the continued growth in the value of silver can serve as the continuing relative "overbought" gold. For example, when the gold price highs above $ 1900 per ounce may be followed by some correction."

On the spread as a possible factor in the rising cost of silver and tells Artyom Kopylov, analyst UK "alpha-Capital", which, however, believes that the delusion here is not: "During the market crash in early 2020, the price divergence between silver and gold has reached historic highs, which made silver very cheap relative to gold. At the moment we are seeing a recovery of the spread between assets to their historical average, which is reflected by the increase in the price of silver. We believe that the growth of demand for silver triggered by a technical factor, which will soon be fully priced in by the market, because such inefficiency is quickly "eaten" by the experienced participants of the market."

Factor 3: the incentives of regulators

governments around the world take measures to support national economies, the volume of this unprecedented liquidity flows that continue to reach the market (only in the US is over 2 trillion dollars). Measures including faster return of the stock market in form, but they are also driven investors into the anti-inflation assets such as precious metals. The advantage of this background can get silver, platinum, palladium, and copper. It is important, incidentally, that the program of support of national economies has a negative impact on the profitability of another traditional defensive asset – bonds, also pushing investors to the choice of precious metals.

the Word of skeptics

Although silver is in many respects now looks attractive for purchase, the experts give a very cautious recommendation. The main reason in the short-term factors that provide the potential growth of the asset, and in typical silver high volatility.

"the Risk of declining silver prices is the expansion of the economic crisis, most likely in the case of several waves of epidemics that greatly slows down business activity and demand recovery in the real sector of the world economy. If the overall decline is not accompanied by rising inflation, and economic indicators will be worse than during maximum utilization of quarantine measures in April – may, silver along with all other commodities will start to lose value. As with uncertainty during the subprime crisis in the US, it can lose up to 50% of the cost in a relatively short period of time," emphasizes Mironyuk (IR "freedom Finance").

From rash purchase warns and Yaroslav Kabakov, Director of strategy IK "FINAM", reminding how important it is for the investor not to fall for the news hype. "The silver market is incredibly small compared to the leaders of the turnover of the commodity market, and therefore subject to considerable manipulation, including on the basis of information of emissions... don't rush into buying a given asset liquidity risks and manipulation can essentially block the potential profit. Over the last few months of the pandemic COVID-19 there was a significant supply disruptions of the physical volume of silver, and largest mining companies have cut production. Mexico reduced production in April by 40% year-on-year in Peru, the second largest producer of silver, the reduction in April was 74%, the loss is even greater than in Mexico. ... This means that in the second quarter of 2020, there was a great decline in silver mining, which could not affect prices in the global recovery, and imbalances of supply and demand will be present until the end of 2020. Significant demand for physical silver is now showing ETF-funds that invest in it. Investor demand for silver is largely due to the hedging of investment portfolios as a safe-haven asset".

the Experts also agreed the price of silver: in the short and medium term is from 21 to 25 dollars per Troy ounce, and then can be rolled back to levels 17-18 dollars; this, in particular, warns Kabakov (IR "FINAM").

the income Potential is not amazing, but the risks are quite obvious.

the Way to silver

If silver still want to add to your investment portfolio, the Russian retail investors for not so many possibilities. Physical silver bullion or even coins to call the liquid can only with great reserve, and a number of high-quality financial instruments linked to silver, available only to qualified investors (e.g., individual us ETF funds).

Advanced investors can consider silver futures, however, as stressed by Kopylov (UK "the alpha Capital"), for "this need to constantly shift in distant contracts to avoid forced closure due to expiry. This can lead to additional transaction costs. Buying longer contracts can be difficult due to low liquidity in the market."

Another option is the shares of companies engaged in the extraction of silver (in Russia in the first place, "Polymetal" and "Norilsk Nickel). They, according to Mironyuk (IR "freedom Finance"), are "the most reliable and least costly form of investment for non-qualified investors".