The prevailing geopolitical tensions, supply constraints, higher demandand trade wars have led to the spot prices quoting premium to the future prices, a phenomenon known as backwardation

Thepast few weeks saw frenzy in gold and silver, rattling many nerves. There was a clear FOMO (Fear Of Missing Out) in the rally as prices kept up continuously. The supply squeeze though was real, let’s understand the mania around the galloping gold and silver prices, better. Gold alone has hit over 40 new highs in this year alone.

These precious metals are seen as currency replacement i.e., when there is distrust in paper or fiat currency has gained attraction. While gold is perceived as a store of value, silver has large and expanding industrial usage. Gold is also used in some satellite and space products, but the largest utility is through jewelry and bars (storage). Silver’s demand is on a constant rise in the last few years driven principally by the emerging technologies i.e., in EV (Electric Vehicles), semiconductors and renewable energy (Solar) industries.

Gold is extracted directly from the ore, while Silver is a byproduct of Lead, Copper, Zinc and Gold refining. Though in the last few years, particularly since the Ukraine war, despite the consistent accumulation by the central banks, the demand-supply equation has been mostly surplus for gold. Silver has been in an on-off deficit situation, though there’s a persistent deficit consecutively for the last three years. This is one of the fundamental drivers for the current price spike.

Of course, historically gold silver ratio is another barometer to understand the price action of silver. It’s simply explaining how many ounces of silver could be purchased using an ounce of gold. It currently stands close to 82:1 that means, one could be able to buy about 82 ounces of silver with one ounce of gold. The ratio peaked to about 120:1 during market turbulence and has fallen to as low as 20 to 1. While some believe it finds no relevance in today’s times, it’s a back-of-palm valuation metric to understand the silver’s relative valuation.

India becomes the eye-of-storm in the recent silver price jumpwith sudden surge in demand duethe festival buyingand partlyto short covering,were aggravated by the supply squeeze at the LBMA (London Bullion Market Association) coincided with the absence of Chinese players owing to the Golden week holidays. With the US administration including Silver in the critical minerals to section 232 regulation, dried the movement of precious metals from US to the rest of the world.

Usually, the future price of metal is quoted higher than the spot as it includes the cost of carry (holding) and storage of the metal. This is known as Contango. The prevailing geopolitical tensions, supply constraints, higher demandand trade wars have led to the spot prices quoting premium to the future prices, a phenomenon known as backwardation. It means that the buyers are willing to bear higher costs to own it at spot than to wait. This is due to extreme demand while representing the lack of confidence in the paper guarantee (futures).

Of course, such instances of backwardation happened at times, including as latest as last month but the tenacious premiums for consecutive days have triggered a vicious cycle of higher demand for the metal. Unlike the 80’s episode of Hunt brothers trying to corner the silver market culminating in margin calls, the current silver price is demand driven with a confluence of multiple factors. The long serpentine queues outside the retail outlets not just in India but in the developed world to buythe physicalmetals is evidence to it. The just concluded Dhanteras had seen a jump of 25% from last year pegging the total gold & silver sales at Rs. 60k Cr.

The ETFs (Exchange Traded Funds), the paper investments into the precious metals, particularly from the western investors saw a steep rise (after remaining subdued for months) in the last 10 weeks. Gold inflows alone attracted $34.2bn in just last 10 weeks. The gold and silver funds recorded $8.2 billion in net inflows last week, marking the second-largest weekly inflow on record, coming after a record $9.5 billion inflow in the previous week.The four-week moving average of inflows consequently hit a record $7.5 billion.

(The author is a partner at “Wealocity Analytics”, a SEBI registered Research Analyst and could be contacted at [email protected])