Silver can still outperform gold even as prices fall 1% below $24.50 – MKS
Silver continues to underperform within the precious metals market and has been unable to hold gains above $25 an ounce even as gold prices hold near their record highs.
Despite the disappointing price action, many analysts remain optimistic that silver will have its turn to shine in the spotlight.
Even with higher volatility, Nicky Shiels, head of metals strategy at MKS PAMP, said silver is building a solid floor above $23.50 an ounce. She added that she sees potential for the white metal to reach $28 an ounce this year.
The bullish outlook comes as gold prices hold solid support above $2,150 an ounce; spot silver has fallen to a one-week low, last trading at $24.36 an ounce, down more than 1% on the day. The gold/silver ratio remains elevated and is above 89 points.
However, with inflation expected to remain stubbornly elevated for longer than forecasted, Shiels said that she expects the ratio to start falling.
“US growth has exceeded expectations as the Fed manufactures a soft landing while ROW / global growth is ‘stable’ish.’ With expected easier G-10 monetary policy now collectively tolerating a ‘higher for longer’ inflation regime, high beta cyclical commodities like Silver should outperform & the ratio should rerate lower,” she said in a note published last week.
Last week the Federal Reserve signaled that it was still on track to lower interest rates three times this year even as inflation remains above its 2% target.
Along with easing interest rates, Shiels noted that silver remains well supported by strong supply and demand fundamentals as demand continues to outpace supply.
She pointed out that India has once again become a robust source of demand for the physical metal. Quoting the nation’s trade data, Sheils said that in the first two months of the year, India has imported about 3,000 tonnes of silver.
“While that buying pace may subside, we don’t foresee a dramatic scale back in purchases at $25/oz+ prices,” she said.
At the same time, analysts expect healthy industrial demand to push the silver market into another deficit this year. According to research from the Silver Institute, global silver demand is expected to reach 1.2 billion ounces in 2024, the second-highest level on record.
Shiels noted that ongoing demand for silver has pushed above-ground stocks held with the London Bullion Market Association to record lows of 814 million ounces.
Meanwhile, the supply of silver continues to dwindle. Sheils noted that silver production from Mexico and Peru, the world’s top two producers, has dropped to its lowest level in 14 years.
“Mexico & Peru together are producing 25% less vs 2016 levels, helping drive the drawdown in above-ground stocks as a substitute,” she said.
As to what will drive investors back into silver, Shiels said that she expects investment demand to pick up as central banks start to cut interest rates. The Federal Reserve is likely to embark on its easing cycle with a cut in June. She added that geopolitical uncertainty ahead of the U.S. elections can also create some safe-haven demand for silver.
“Trying to time investor engagement is tricky, but as is the case with gold, it’s usually a FOMO trade, so a technical breakup & above $26 (a relatively sticky area) should attract the momentum crowd,” she said.
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