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Silver may continue to outperform others

February 22, 2012


Silver has displayed a smart rally in the current year so far, rising 21.2 per cent from January onwards. And, there are indications it would continue to outperform other metals like gold and copper. This would be good news for India’s largest silver producer, Hindustan Zinc, as the metal is likely to contribute 14-20 per cent to its Ebitda (earnings before interest, taxes, depreciation and amortisation) margins.

Barclays Capital’s commodity outlook says: “The current profile of our price forecast suggests precious metals would be the strongest sector in 2012. We expect silver to reach $38 and rise even further in the third quarter of 2012, before profit booking sets in. At present, it is in a consolidation mode.”

Barclays says physical demand has been driving silver for the past few weeks.(Click here for graphs)

Following record gains in silver in late 2010 and early 2011, prices crashed towards $25. Since then, they have rebounded to $33-36. Currently, silver is facing strong resistance above $34.5 and getting support at $32.5.

Technically, we could see one more quick dip below $30. However, a decline to $25 or lower may not happen anytime soon. Silver is currently facing resistance at the critical level of $35. If it breaks to the upside, it will quickly climb to challenge the $50-mark once again and reach a high between $55 and $65 by the end of the year, technical analyst Jason Hamlin of Gold Stock Bulls says in his technical analysis.

Indications available from ratio trading suggest silver has outperformed gold, copper and crude oil since the beginning of January. The gold-silver price ratio has fallen from 56 to nearly 51 now, indicating silver outperforming gold. Similarly, crude silver ratio has come down from 3.86 to 3.57 and that of copper-silver has gone up from 118 to 129 now. Both these ratios indicate silver has done better.

As for safe-haven demand, silver traditionally tracks gold, while crude oil and copper reflect the economic scene and demand. Silver has heavy industrial use, so it tracks industrial activity, too. Whatever way economic demand moves, silver looks set to benefit.

Industry sources say, “Silver saw a high of $49 last April and has been in a consolidation mode since then. The consolidation phase for silver has lasted longer than for any other metal. Now, it should do well.”

Hindustan Zinc will be a major beneficiary of the metal’s surge, as it is the largest producer of silver in India. The company is expected to produce 250 tonnes of the commodity in the current financial year and is likely to raise its production to 500 tonnes in 2012-13.

Angel Broking senior research analyst Bhavesh Chauhan says, “Even if we take the conservative estimate of 400 tonnes and a price of Rs 50,000 a kg (which is 12 per cent lower than on Tuesday’s price), silver will contribute 20-24 per cent to Hindustan Zinc’s Ebidta margins.”

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