Higher gold price and industrial rebound to lift silver - Capital Economics
Metals

Higher gold price and industrial rebound to lift silver

Precious Metals Update
Written by Samuel Burman

A higher gold price, along with the ongoing recovery in industrial demand, particularly from China, means that the price of silver is likely to rise in the year ahead.

  • A higher gold price, along with the ongoing recovery in industrial demand, particularly from China, means that the price of silver is likely to rise in the year ahead.
  • The silver price has fallen sharply in recent weeks, from a peak of around $29 per ounce to $24 owing to some appreciation in the US dollar and an uptick in US real yields, which have also weighed on the gold price. Nevertheless, it is still up year to date primarily because demand has held up well as a result of strong safe-haven buying as well as the rapid recovery in industrial activity in China.
  • We expect that silver demand will fully rebound to pre-virus levels in early 2021. Demand for non-interest bearing safe-haven assets, such as gold and silver, should rise as real yields in the US drift a little lower. We forecast that the US ten-year nominal yield will fall to 0.50%, from 0.70% currently, by the end of this year and that it will remain at this level in 2021. The Fed has already stated that it will keep policy ultra-loose until at least 2023 and allow inflation to overshoot its target. (See our US Economics Update.)
  • At the same time, we expect industrial demand for silver to continue to increase, primarily on the back of ongoing fiscal stimulus in China. Around half of annual silver consumption is accounted for by industrial activity and the silver price tends to broadly track industrial metals prices. (See Chart 1.) What’s more, many governments are investing heavily in green energy, which may lead to higher demand for solar panels, which contain silver paste.
  • Admittedly, the development of a successful vaccine would probably ease concerns about the outlook for global economic activity and, in turn, weigh on demand for safe-haven assets. (See our Commodities Update.) However, if this were to happen, we suspect that any decline in safe-haven demand will be partially offset by an increase in industrial consumption.
  • Meanwhile, according to the Silver Institute, global mine production of silver is expected to fall by 7% in 2020 due to virus-related restrictions. Some production has already come back on stream, but we doubt that production will bounce back to 2019 levels anytime soon. Around 40% of supply is mined in Latin America, particularly in Mexico and Peru, where the virus is still spreading and where underground mining makes it difficult to adhere to social distancing rules. Putting supply and demand together, we estimate that the silver market will remain in a small deficit through to 2022. (See Chart 2.)
  • All in all, a market deficit in conjunction with a higher gold price should lift the price of silver to $25 and $27 per ounce by end-2020 and end-2021, respectively.

Chart 1: Silver & Industrial Metals Prices (2020)

Chart 2: Silver Market Balance (Mn. Ounces)

Source: Refinitiv

Sources: Silver Institute, Capital Economics


Samuel Burman, Assistant Commodities Economist, samuel.burman@capitaleconomics.com