Silver was supposed to be the shining star of the precious metals market for 2018. Instead, it turned out to be the sector’s biggest disappointment.
However, despite the precious metals lackluster performance this past year, there is still some optimism in the marketplace that silver prices could see a reversal of fortunes and outperform next year, especially if gold prices turn around.
A potential turn around comes after silver dramatically underperformed gold prices, with the gold silver ratio holding near a 25-year high. Kitco.com shows the ratio currently trading at 84.74 points. The historical average for the ratio is around 50.
The renewed optimism for silver comes as prices look to end the year down more than 13%. According to commodity analysts, the precious metal, which has significant industrial usage, was dragged down by weak base metals, in particular, copper which fell dramatically from a nearly four-year high in early June.
An escalation in a global trade war between the world’s two largest economies has been a drag on economic growth expectations as well, leading market players to forecast weaker demand for industrial metals, including silver, said some analysts.
However, silver is expected to shake off its industrial influences and shine as a monetary metal, outperforming gold in 2019 as the U.S. dollar weakens on the Federal Reserve slowing down its monetary tightening policies.
“If you are bullish on gold you should be bullish on silver,” said Bill Baurch, president of Blue Line Futures.
Natixis is one of the most bullish banks on silver heading into the new year. In its 2019 forecast, the French bank said that it sees silver prices pushing to a high of $18 and averaging the year around $16 an ounce.
In a recent interview with Kitco News Bernard Dahdah, precious metals analyst at Natixis said that his optimistic outlook on silver is a result of his positive view on gold. He noted that silver is about 1.3% more volatile than gold, so if gold prices move higher, silver should outperform.
“Although silver has significant industrial demand it is still a precious metal and eventually will see a pickup in investor demand,” he said. “Safe-haven demand will be a major driving factor for both gold and silver in 2019.”
Dutch bank ABN AMRO (AS:ABNd) is also optimistic about silver, seeing prices push to $18 an ounce in 2019 and averaging the year around $16.60 an ounce.
Georgette Boele, coordinator of FX and precious metals strategy at the bank, said that lower bond yields and a weaker U.S. dollar should be positive factors for silver prices.
“We think that silver prices have seen the low and we expect higher prices from now. For a start, we expect the US dollar to weaken and US Treasury yields to decline in our forecast horizon,” Boele said. “Our positive outlook for gold prices should also support silver prices.”
Investors To Return To Silver In 2019
Andrew Hetch, creator of the Hetch Commodity Report, has been fairly bullish on silver, despite its disappointing performance this past year. In an email response to Kitco News, he said that he still sees a potential for the precious metals next year.
He added that renewed investors demand next year will be the biggest driver for the metal, which will push prices to a high of $17.365 next year with an average price around $16 an ounce.
“Given the potential for a more than interesting year from an economic and political perspective, gold and silver could do well,” Hetch said.
The comments come as physical investment demand, an important barometer for investor appetite, dropped to their lowest level in nine years.
This past year, the U.S. Mint has sold 15.4 million one-ounce American Eagle Silver coins, down more than 14% from 18 million ounces sold last year. Silver coin demand is down more than 67% from the record high of 47 million ounces sold just three years ago.
Commodity analysts at Capital Economics are also expecting to see investors return to silver as the firm sees the precious metal ending next year around $17 an ounce.
“We think that 2019 will mark a turnaround for the silver price. This will be chiefly driven by a recovery in investor demand, fueled by monetary tightening in the US ending sooner than markets anticipate,” the analysts said in a report. “In addition, our expectation of further falls in equity prices and bond yields, particularly in the US, should trigger asset reallocation to safe havens, including silver. Thus we are estimating ETF demand to be in the order of 100 million ounces and bar & coin demand to be sparked back into life.”
Growing Surplus A Hurdle For Silver Prices
However, not all commodity analysts are optimistic on silver heading into the new year. Commodity analysts at Commerzbank (DE:CBKG) said that they see silver prices rising to $16 an ounce by the end of 2019; they added that the market won’t outperform gold and the gold-silver ratio will remain near its 25-year high of 84 points.
The analysts said they see the metal struggling as global growth looks to weaken next year, lowering the metal’s industrial demand as supply continues to grow.
Research firm Refinitiv is expecting the silver market to hit a surplus of more than 35 million ounces, its highest level in nine years and Commerzbank said that they don’t see the situation improving much next year either.
“ETF investors will not nearly be able to absorb this oversupply,” the analysts said. “The trade conflict is unlikely to be resolved in the near future, and the global economy looks set to lose momentum. This should continue to put the brakes on industrial demand.”
Bank of American Merrill Lynch said while it sees prices pushing to $18 an ounce next year, it is not very optimistic on the precious metal because of the market’s growing surplus.
“There are too many spare ounces of silver floating around the market to support bullish market fundamentals,” said Michael Widmer, metals strategist at the bank, in a 2019 outlook presentation.
Other banks who are nonchalant on silver next year include JPMorgan (NYSE:JPM). Commodity analysts see the precious metal averaging the year at $15.84 an ounce.
The most bearish bank on silver appears to be BNP Paribas (PA:BNPP), which sees silver averaging 2019 around $14.20 an ounce.
Harry Tchilinguirian, global head of commodity markets strategy at BNP, said in an email comment to Kitco News that his bank is negative on precious metals next year, preferring to hold treasuries to gold and silver.
“With inflation expectations, expressed by the 5year/5year forward breakeven rate, falling rapidly since mid-October, we think real rates will move higher which is negative for [precious metals] in terms of the opportunity cost of holding the non-yielding asset,” he said. – Neils Christensen
The Silver Market Update
Clive Maund – Silver is now very cheap compared to gold (as is platinum) and recently hit a 24-year low reading as can be seen on the latest chart for the silver to gold ratio shown below, which means two things – one it is very good value relative to gold, and the other is that this kind of extreme normally occurs ahead of a major new sector bullmarket. Silver is also cheap relative to its average AISC (all-in sustaining cost of production) which implies a shortage down the road and much higher prices.
However, the above very bullish factors won’t necessarily stop it being dragged down lower still for a while during a market crash. In the parallel Gold Market update we have looked at the likely outcome of next week’s Fed meeting and its impact on the dollar, which will affect silver as much as gold. On silver’s latest 6-month chart we can see that last week it made a rather feeble attempt to break above the resistance at the top of its trading range, a range that has been building out since the September low. The attempt failed, with it starting to drop back on Friday and it now looks set to drop back initially to the lower boundary of this range again.
Anyone privy to the latest COT data ahead of the crowd, who get it 3 days later after it has been bounced off a satellite orbiting Uranus, would have known that silver would drop back from the resistance at the top of the range again, because over the past 2 weeks, and especially the past week, the Commercials piled on the shorts again, as we can see on the latest chart below. Silver’s COTs had been supportive, but have deteriorated significantly over the past several weeks, opening up downside risk again.
Silver’s long-term 10-year chart now looks weak, with it looking set to crash the support at the late 2015 – early 2016 lows, which it has been perched just above for the past several months, and head lower, perhaps as low as about $10, which we would expect to occur against the background of a widespread heavy selloff across the commodity sector and stockmarkets. Needless to say, if it winds up at such a silly level, it will be a very strong buy. The falling 200-day moving average is bearing down on the price from above and the Accumulation line is weak, having recently broken to new lows.
