Goldman Sachs: Silver To Remain Soft Relative To Rising Gold
The investment bank Tuesday released a report maintaining its view that gold will climb toward $1,450 an ounce by the end of the year even if real interest rates rise. However, analysts called for the gold-silver ratio to remain stable, meaning that silver stays at a historically weak level relative to gold.
The key difference in Goldman’s views toward the two metals is emerging-market investment demand, which they say is strong for gold but not as major of a factor in the silver market.
The bank’s views on the precious metals were included in a report in which the investment bank described itself as favorable toward the commodities complex as a whole.
Goldman called for the gold-silver ratio to remain around the current level of 80, meaning it takes roughly 80 ounces of silver to buy an ounce of gold. Goldman also revised downward its three-, six- and 12-month silver price forecasts to $16.80, $17.10 and $18.10 a troy ounce from its previous forecasts of $17.80, $18.30 and $20.30.
“Silver continues to trade in the $16-17.50/toz range it has been stuck in over the past year,” Goldman said. “Meanwhile, the continued upward trend in gold has pushed the gold silver price ratio to 80, which is close to its highest level since the early 1990s. Silver’s underperformance was primarily driven by weakness in investment demand.”
Silver retail investment tends to come from different countries than for gold, Goldman pointed out. Gold retail investment is dominated by emerging-economy nations such as India and China, while silver investment demand comes primarily from countries with developed economies. In the case of the latter, demand for precious metals has weakened due improving risk sentiment.
“In addition to this, silver industrial demand levels remain low relative to mine supply, which is expected to grow strongly over the next several years,” Goldman said.
In the longer term, Goldman said, silver’s supply/demand fundamentals should improve as industrial demand gets a probable lift from substitution away from copper and gold. Also, silver mine supply growth should be restrained by the lack of recent investment into copper and zinc mines, which has ramifications for silver since the majority of mine supply is a by-product of mining operations for other metals.
“Over the near term, however, we do not see a compelling case for silver to outperform gold because there is no clear catalyst for silver investment demand to recover, and industrial demand will take time to catch up to mine supply,” Goldman said.
However, Goldman said it sees gold rising to $1,450 an ounce by the end of 2018 even if real interest rates climb, with the yellow metal drawing support from emerging-market demand.
“We remain bullish on the outlook for gold,” Goldman said.
The bank’s report comes as the metal is falling in part due to a stronger U.S. dollar and prospects for higher U.S. interest rates. Treasury 10-year yields climbed above 3% last week for the first time since 2014.
Goldman noted that the “normal relationship” would portend weaker gold as real interest rates (the difference between actual rates and inflation) rise.
“However, we would argue that this view misses the slower-moving, but equally important, effect of the trends in global, and particularly EM, wealth,” Goldman said.
As emerging-market economies continue to recover in the aftermath of the financial crisis, purchasing power has improved in emerging-market nations. And that in turn supports gold demand, Goldman said. This has already shown up in accelerating emerging-market jewelry demand in the last quarter of 2017 and monthly import data for China and Turkey in January and February, Goldman continued.
“Accordingly, we continue to expect gold prices will move gradually higher, reaching $1,450/toz by end-2018,” Goldman concluded.