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Silver price to get a boost from higher gold price, improved demand into year-end, says Capital Economics

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(Kitco News) Silver will get a boost from higher gold prices and better industrial demand into year-end following a sharp price drop down to $23 an ounce in September, according to Capital Economics.

“A higher gold price, along with the ongoing recovery in industrial demand, particularly from China, means that the price of silver is likely to rise in the year ahead,” Capital Economics said in a report published on Wednesday.

Silver saw a significant decline in September, falling from a peak of $29 an ounce down to below $23. At the time of writing, December Comex silver was trading at $23.440, down 4.11% on the day.

The precious metal is feeling the downward pressure from the somewhat firmer U.S. dollar and an uptick in U.S. real yields — the same drivers weighing on gold at the moment, wrote Capital Economics assistant commodities economist Samuel Burman.

However, the recovery is on its way, thanks to higher gold prices and stronger industrial demand into the year-end, Burman pointed out.

“All in all, a market deficit in conjunction with a higher gold price should lift the price of silver to $25 and $27 per ounce by end-2020 and end-2021, respectively,” he wrote. “Demand for non-interest bearing safe-haven assets, such as gold and silver, should rise as real yields in the U.S. drift a little lower. We forecast that the US ten-year nominal yield will fall to 0.50%, from 0.70% currently, by the end of this year and that it will remain at this level in 2021. The Fed has already stated that it will keep policy ultra-loose until at least 2023 and allow inflation to overshoot its target.”

Capital Economics projects for gold to end the year at $2,000 an ounce, which is more than $100 from the current trading levels. 

Demand for silver is expected to fully recover to pre-pandemic levels early next year, noted Burman.

“We expect industrial demand for silver to continue to increase, primarily on the back of ongoing fiscal stimulus in China. Around half of annual silver consumption is accounted for by industrial activity and the silver price tends to broadly track industrial metals prices,” he said. “What’s more, many governments are investing heavily in green energy, which may lead to higher demand for solar panels, which contain silver paste.”

On top fo that, silver global production is estimated to fall by 7% this year due to COVID-19 restrictions, added Burman, citing the Silver Institute data.

“Some production has already come back on stream, but we doubt that production will bounce back to 2019 levels anytime soon. Around 40% of supply is mined in Latin America, particularly in Mexico and Peru, where the virus is still spreading and where underground mining makes it difficult to adhere to social distancing rules. Putting supply and demand together, we estimate that the silver market will remain in a small deficit through to 2022,” he said.

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