Silver is down, should you invest in it now?

Mumbai-India (Jan 13)  The year 2013 was bad for bullion and it may perform poorly in 2014 as well. However, there is likely to be a divergence in the performance of gold and silver. Last year, as growth prospects and risk appetite improved, investors opted for equities in the developed market while dumping silver and gold.

The expectations of tapering of the stimulus programme by the US Fed, and the resultant strengthening of the US dollar and hardening of interest rates in the US, also contributed to bullion's poor performance. As these trends are likely to continue this year, gold may remain under pressure.

However, industrial demand may prove to be the saving grace for silver. Most base metals have already begun to rally in anticipation of a global recovery. Silver's undervaluation vis-a-vis gold may also weigh in its favour. The gold-to-silver
price ratio is currently higher than its historical average.

"The gold-to-silver price ratio is expected to fall to 50, the long-term average, in the next 1-2 years," says Praveen Singh, senior commodities analyst, Sharekhan. If the global recovery accelerates, the fall in this ratio may be driven by the rise in silver's price. However, tapering may cause a short-term hiccup. "There is a limited downside risk for the international price of silver. While it may fall to $18 per troy ounce by March, it should rise to $25 by the end of this calendar year, " says Singh.