Can Fed's Tightening Keep Silver Down? Capital Economics Weighs In
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Despite silver’s growing demand and falling mine supply, price projections for this year are faltering, Capital Markets said in its latest report, which focuses on explaining this paradox.
Capital Economic released a fairly bearish price forecast for silver, with the metal ending 2017 at around $15 per ounce, but recovering to $16 by the end of 2018.
Silver prices have been under pressure since mid-April, after rallying in the beginning of the year. On Friday, spot silver on Kitco.com was trading around $15.93 during the North American afternoon session.
The main driver keeping silver down during this year is the Fed’s tightening cycle, with another rate hike expected in the second half of 2017, the report said.
“The prospect of a steadily tighter U.S. monetary policy environment has probably deterred investors from buying a non-yielding asset like silver,” said Capital Economics analyst Simona Gambarini.
The impact of Fed’s rate hikes is estimated to even offset higher demand and lower mine output — the two key elements that could offer great support to silver prices, the report noted.
Capital Economics pointed out that industrial silver demand will grow by about 1% in 2017, while silver mine production output is expected to decline by about 3% during the year.
“Over 50% of silver is used in industrial applications each year. These include electronics, solar panels and cells, photography and soldering,” the report said.
Gambarini explained that lower mine production will likely be caused by flooding in Peru, strikes in Mexico, and reserves exhaustion.
“Production in Mexico and Peru – the world’s largest producers – fell by 4% and 3% y/y in January to April,” she wrote.
But, all of the above will not be enough to save silver prices from falling this year, Capital Economics said.
“While there are some bright spots in silver’s fundamental picture, like falling mine production and rising use in industrial applications, we doubt that they will be enough to offset the negative impact on prices of rising US interest rates,” the report started. “Our end-year forecast for prices is $15 per ounce, down from about $15.7 currently. We see the price of silver rising back to around $16 per ounce by the end of 2018.”