Silver is a 'tagalong' that will underperform gold until this catalyst kicks in - Scotiabank
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(Kitco News) Silver prices will continue to underperform the bullish gold market in the near-term, but one catalyst could help turn things around for the precious metal, according to Scotiabank.
Silver had a tough first quarter, falling to below $12 an ounce. Since then, prices have somewhat recovered but the gains are very limited compared to gold’s recent spikes above $1,700 an ounce. Silver May Comex futures were last trading at $14.975, down 4.09% on the day.
“Silver [is] the ‘tagalong’ awaiting a growth inflection point or catalyst,” Scotiabank commodity strategist Nicky Shiels said in a report last week. “[The metal] will begrudgingly tag behind any gold rise and should continue to underperform in the near-term until the growth inflection point.”
The gold-silver ratio is now at 113, after rising to an all-time high of 125 in March. This means that it now takes 113 ounces of silver to buy one ounce of gold.
The needed catalyst to push silver prices higher is lower supply and higher demand, but improved supply-demand fundamentals can only appear with time, according to Scotiabank.
“Fresh catalyst emerging with 1/3rd of global supply down, but fundamentally requires years of deficits to substantially draw down inventories,” Shiels wrote. “Gold/silver ratio to remain in a less bullish uptrend as macro markets navigate from late cycle era to recovery period.”
There is potential for silver to go higher but the strength of the move depends on several factors, which Shiels outlined.
“Upside (>$20) dependent on: gold outperformance, inflation and reflation risks and fresh real demand drivers in medium term, potentially stemming from known (PVs) and nascent (auto) industries.”
When it comes to gold, Shiels forecasts a “more bullish trajectory than the 2009-2012 cycle.”
The yellow metal’s outlook is based on slower global economic growth and unprecedented level of monetary and fiscal stimuli.
“New super bullish structural themes have emerged faster than anticipated (bigger gov, unlimited QE, negative interest rates, unlimited deficits, Fed buying junk bonds, MMT-like policies),” Shiels stated.
The path to higher prices is not without its obstacles, including liquidity issues, weaker Asian physical demand, and slower central bank buying.
But, increased Western interest from retail and institutional investors should be enough to “offset weaker physical demand and the short-term headwinds,” Shiels notes.