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Capital Economics looks for silver prices to drop 5% to $21.50 before year-end

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(Kitco News) - The global green energy transformation won't be enough to support silver prices through the rest of the year and in 2022, according to the latest research from Capital Economics.

In a report published Thursday, Kieran Tompkins, assistant economist at the U.K.-based research firm, said they are taking a dim view of silver as they expect demand to weaken through next year. In an updated forecast, Capital Economics expects silver prices to end the year at around $21.50. For 2022 the firm expects prices to fall to $21.

With its current forecast, Capital Economics is expecting silver prices to drop more than 5% before the end of the year. December silver prices last traded at $22.725 an ounce, up nearly 1% on the day.

Tompkins said that they expect the silver market to see softer industrial demand going forward.

"There are early signs that growth in industrial demand for silver has started to wane. Indeed, the [three-month] average of the output balance of the global electronics PMI has fallen since its peak in May," Tompkins said.

Tompkins also said that the global push for renewable energy might not provide much support for silver.

"Admittedly, growth in silver demand will be supported by the green transition in many economies, given that silver paste is used in photovoltaic cells for solar panels. But photovoltaic demand for silver only accounts for 20% of total industrial demand for the metal, so any increase may not be enough to offset any drop-off in broader industrial demand growth in the near term," he said.

Looking at investment demand, Capital Economics expects that the Federal Reserve's shift to tighten its monetary policies could weigh on silver as a monetary metal.

The Federal Reserve has signaled that it could start to reduce its monthly bond purchase before the end of the year. Meanwhile, last month, central bank projections pointed to a potential rate hike by December 2022.

"Our expectation of a rise in long-dated real yields will raise the opportunity cost of investment in silver. And it also underpins our view that the US dollar will continue to strengthen, which is normally negative for the price of silver," said Tompkins.

He added that because of silver's expected weak industrial component, the precious metal could continue to underperform gold prices through 2022.

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