Record peak gold prices, Chinese economic stimulus, US rate cuts and geopolitical tensions bolstered the appeal of silver last year. In the key London spot market, prices tested a 12-year high of $34.8 an ounce in October and ended the year with a gain of 37 percent. Meanwhile, domestic silver futures posted an 18 percent return, the highest annual return since 2020.
Gold and silver have a strong positive correlation, and it usually exhibits similar price movements. Historically, both are considered precious metals and are often influenced by similar market factors. Last year gold surged more than 27 percent due to positive fundamentals like worsening geopolitical conditions and speculation over US rate cut decisions.
China is the world’s largest consumer of silver. The country’s rapid industrialization and commitment to renewable energy have driven demand for silver in electronics, solar panels, and other industries. Last year, China’s Central bank unveiled its biggest economic stimulus since the pandemic. The broader than expected package and interest rate cut were expected to restore the manufacturing activity and the demand of industrial metals.
Last year, the tensions in Middle East and Russia-Ukraine war increased the demand optimism in safe assets. Bullion has historically been a crisis hedge due to no credit risk and negative correlation to risk assets. Due to this feature investors tend to flock to silver which is also considered as a safe commodity during times of growing geopolitical tensions.
The 100-bps rate cut by the US Federal Reserve last year was broadly supportive for bullion. The US Fed Reserve lowered its rates to 4.5 percent for the first time in four years and hinted more cuts are likely in 2025. Low interest rates for bank deposits and bonds depreciated the value of US currency prompting investors to rely on non-yielding safe assets like bullion.
Looking ahead, there are some barriers for silver prices to extend its bullish outlook. China’s industrial demand for silver plays a pivotal role which is in shaping the market dynamics of silver in 2025. The recent economic stimulus measures aimed at boosting the economy and bolstering industrial output, if successful, can revive demand and thus the prices of silver in the coming months. Likewise, the new US President’s ‘America First’ trade policies may also have a ripple effect on global commodity prices. Tariff threats and trade wars can create economic uncertainty, leading to volatility in commodity markets. A likely imposition of tariffs on imports from major trade partners like China and Canada can create uncertainty and disrupt supply chains in future.
The performance of the US dollar, which is usually inversely correlated to bullion, may affect the price performance. Followed by Trump’s Presidential victory, the US dollar gained significantly and is now hovering near two-year highs. Trump’s America First policies are expected to boost the US currency further.
On the trading side, the London spot prices may vary inside $35-26 an ounce level initially and breaking any of the sides would suggest fresh short-term directions. However, the outlook for domestic silver remains rangebound with little chance for selloffs. As the rupee weakened to its all-time low the domestic price of silver continues to be high while gold prices are a near record. This may shift investor and consumer attention towards silver due to affordability and investment diversification.
(The article is authored to Hareesh V, Head of Commodities, Geojit Financial Services.)