Silver has become caught up in frenzied retail activity in recent days. Interestingly, silver does not look cheap relative either to gold or copper. Furthermore, looking at futures positioning, it is difficult to argue that silver has been massively shorted by hedge funds (net long positioning on futures market is actually elevated from a historic perspective). Also, for a short squeeze to be effective means owning a large chunk of physical silver, which seems improbable. Finally, there is little evidence that market participants are keeping the silver price artificially low, while some big hedge funds seem actually to have long exposure to silver ETFs. In short, we believe that excessive optimism about silver’s very short-term prospects is unwarranted.
Away from short-term speculation, the current global economic recovery, and with it an increase in industrial demand, is supportive of silver relative to gold. But the relative gold-silver price ratio today is very close its historic average, suggesting silver is fairly priced. Nor does a look at volatility bands indicate that silver is undervalued relative to gold. In short, the scope for silver to outperform gold (which continues to benefit from low interest rates) may prove limited.
We do acknowledge that over the longer term, a move towards greener sources of energy and a transition away from fossil-fuel vehicles will support industrial demand for silver. Indeed, as the most conductive metal known to mankind, silver should receive a structural boost from increased reliance on solar energy and growing demand for electric vehicles. However, industry has a strong inclination to be thrifty in its use of this expensive metal by turning to substitutes like copper, which is almost as conductive as silver and much cheaper. Ultimately, industry’s drive for cost efficiency could limit the rise in silver demand linked to a shift towards green energy.
Overall, we expect gold to outperform silver in the short term because of concerns about longer economic lockdowns, a patient Fed and the recent sharp appreciation in the price of industrial metals and silver alike. However, we would expect the gold-silver price ratio to be below its long-term average of 68 over a six-to-12 month horizon. This translates into a three-month projection for silver of USD26.3 per troy ounce, a six-month projection of USD28.2 and a 12-month projection of USD31.5.
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