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Can silver price deliver in 2020?

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(Kitco News) With gold back on the radar for a lot of investors, attention is now turning to silver but can it deliver alluring returns this year?

Prior to the March sell-off, silver was doing well as a precious metals hedge, but its industrial component has been weighing it down.

"Both gold and silver have monetary safe-haven qualities, unlike most commodities, which historically sell-off during periods of equity market weakness and/or heightened concerns regarding the health of the global economy," said Jordan Eliseo, senior investment manager at The Perth Mint. "Concerns about the state of the global economy will have possible negative consequences for the industrial metals, and by extension, silver."

Panic mass sell-off triggered by COVID-19 dragged silver prices to 11-year lows just a couple of weeks ago. Since then, the precious metal has recovered somewhat. Spot silver last traded at $13.96, down 0.43% on the day while May silver Comex prices were last at $14.195, up 0.45% on the day.

"The sell-off was driven by a paradoxically negative macro environment for silver, as evident in a spike in USD and U.S. real rates amid the Fed's failure to reassure the markets," said Orchid Research in a Seeking Alpha post. "Don't get us wrong, though, silver's industrial demand is presently in a precarious state considering that the global economy is paralyzed. Yet, we believe that the chief driver of the silver sell-off was the negative macro-environment."

Lower prices and the overall uncertainty have triggered a surge in physical demand for silver coins in bars with some mints across the world, even selling out of their most popular silver coins.

The Perth Mint is no exception, reporting "a notable increase" in investment demand for silver products.

"Since September 2018, sales of silver minted products have averaged almost 1 million ounces per month, which is a 28% increase relative to the average demand seen in the prior six years," wrote Eliseo.

Demand for silver is expected to continue to rise in 2020, according to The Silver Institute.

"Macroeconomic and geopolitical conditions will remain broadly supportive for precious metals, encouraging investors to stay net buyers of silver overall," the institute's report stated. "Silver physical investment, which consists of purchases of silver bullion coins and bars, is forecast to increase for the third year in a row, up by around 7% in 2020."

Silver price is projected to average $18.40 in 2020, which is 13% higher than last year, according to The Silver Institute. "[The annual gain] is premised mainly on a positive spill-over from gains in gold, as the yellow metal will continue to benefit from macroeconomic and geopolitical uncertainties across critical economies," the report said.

Silver could potentially still outperform gold in 2020, added Eliseo.

"Whilst there are no guarantees that silver will outperform gold in 2020 and beyond, it is not uncommon for this to happen, especially in strong precious metal bull markets where the prices of both gold and silver rise," he said.

The gold-silver ratio is a key one to observe when gauging silver's potential, Eliseo pointed out.

"Assuming the gold price continued to trade at USD 1,600 per troy ounce (where it is at the time of writing), silver would need to rise to just under USD 25 per troy ounce for the GSR to revert to its average of the last 20 years, which is 65. That would be an almost 50% rally in the silver price, relative to where it is trading today," he wrote.

The rise in the gold-silver ratio can also point to the best times to buy, added Orchid Research.

"The underperformance of silver over gold has pushed the gold:silver ratio to an all-time high of 125. This is a great opportunity for long-term investors," the firm wrote. "With silver being extremely cheap compared to gold, we believe that SIVR constitutes an even better buying opportunity. However, we caution that the market tends to inflict maximum pain to market participants before an inflection point is reached. As a result, we think that the use of leverage is unwise at this juncture and that there is no need to be 'all-in.'"

TD Securities sees more pain ahead for silver in the short-term, announcing its "short silver $16.00 Jun 20" call on Tuesday.

"Prolonged weakness in industrial demand should keep silver's recovery under wraps for now. With prices below our trend reversal thresholds, we anticipate firming downside momentum," TD's commodity strategists wrote. 

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