Silver is doing more than playing catch-up with gold, it has been outperforming its yellow cousin since the start of the year and is expected to continue rising faster as investors re-discover a taste for “the other” precious metal.
Driving both gold and silver is the appeal of inflation protection from commodities which have currency tendencies, while silver has the added advantage of growing industrial applications, especially in electronics and solar power.
While gold has been making the headlines with its 15.8% rise since early January to $2365 an ounce, silver has risen by 20.8% to $28.27/oz.
By the end of the year silver could be trading at $31/oz, according to the latest forecast from ANZ, an Australian bank, up another 8%.
Gold, according to ANZ, could rise by another 4.8% to $2500/0z.
For precious metal investors the recovery of silver appears to validate a belief that gold and silver trade in harmony, generally close to a ratio of 78, with one ounce of gold being 78-times the price of silver.
Whenever the metals move away from that ratio, which has no scientific basis, they eventually return, a feature noticed over the past 10 years of metal trading.
Two months ago, the gold/silver ratio blew-out to 91 when the gold price was around $2037/oz and silver was stuck around $22.4/oz.
Silver’s rush to catch-up with gold and return to the 78-ratio started early last month with the combination of investor and industrial demand boosted by tight supply. The ratio currently stands at 83.6.
Structurally Undersupplied
“The silver market is structurally undersupplied,” ANZ said in a research note.
“The growing deficit is well reflected in above ground inventories. Volumes held in the London Bullion Market Association (LBMA) and exchanges have dropped sharply in recent years.
“After peaking at around 1,180 million ounces in mid-2021, the LBMA holdings fell nearly 27% to 856,000 million ounces in December last year.
“The drawdowns have accelerated, with inventories falling by 4% in the first quarter of this year.”
Growing silver investment demand is being matched by increasing demand in jewelry and industry with industrial applications accounting for an estimated 50% of silver consumption, especially in electronics and fast-growing demand from semiconductor production.
Two other factors add to the case for silver, restocking in China and India which are both major silver consumers and sluggish mine supply with most silver produced as a by-product of zinc, lead, and copper mining.
Producing more silver from existing mines could be challenging, especially from the biggest source which is mines in South and central America where operational difficulties have hampered attempts to expand.
ANZ estimates that silver production will grow by 3% this year to 867 million ounces, but that will not be sufficient to meet demand which is expected to grow by between 4%-and-5%.
“We estimate the market deficit will widen to 138 million ounces this year which is 12.5% of demand,” ANZ said.
“This market deficit will likely drive further withdrawal from inventories, supporting the price.”
