You want to be buying silver at $18, says silver market analyst and author Peter Krauth
(Kitco News) - There is a significant disconnect in the silver market between investment demand in paper and physical bullion, and this is an environment where profits are made, according to one market analyst.
Silver appears to be building a solid floor between $17 and $18 an ounce, and while markets could remain volatile through the short-term, current prices represent long-term value, said Peter Krauth, founder of the Silver Stock Investor newsletter and author of a recently released book, The Great Silver Bull.
Krauth added that he sees $18 an ounce as solid long-term support for silver, which represents the average all-in-sustaining costs for silver producers.
"When silver goes to $18, you should definitely be buying," he said. I don't see it going sustainably lower because that would put the market's supply and demand imbalance further out of whack," he said in an interview with Kitco News.
Krauth's bullish outlook for silver comes as the precious metal has seen solid selling pressure through most of 2022 and has significantly underperformed gold as recession fears have weighed on industrial demand. Rising interest rates, pushing the U.S. dollar to a 20-year high
However, Krauth added that despite weak investment demand, the fundamentals for silver haven't changed as the precious metal continues to be a critical component for the ongoing global green energy transition. He added that the supply and demand imbalance is acutely felt among physical investors forced to pay record premiums for bullion because there isn't enough supply.
"Weak investment demand doesn't change silver fundamentals. It's only added to the clear disconnect and it's in these types of markets where you find the best investment opportunities," he said. "We know from history and experience that when the silver market reverts back to the mean and corrects itself, it happens very, very quickly."
Krauth added that while investors have been disappointed in the short-term price action this year, the precious metal has made some impressive gains. He pointed out that from mid-2018 to mid-2019, silver was trading below $15 an ounce.
He added that while silver has been volatile since the COVID-19 pandemic, the average price in the last three years is above $22 an ounce, up nearly 40% from the previous three-year average from 2017 to 2019.
While investor interest ebbs and flows, Krauth noted that industrial demand continues to see steady growth. Analysts expect that more than 100 million ounces of silver will be consumed in the solar power sector this year.
"The world will not be able to meet its green energy goals without silver. Industrial demand is only going to continue to grow, and it is creating a rising floor in silver prices," he said. "Silver has become a critical and replaceable metal."
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As to what will bring investors back to the market, Krauth said that bond yields and the U.S. dollar have to stop rising. The yield on 10-year bonds has pushed above 4%, hitting its highest level since 2008; at the same time, the U.S. dollar continues to trade near its highest level in more than 20 years. Krauth pointed out that these assets represent significant competition with silver.
However, he added that markets are starting to see the Federal Reserve's tightening cycle end early next year and when that happens, investors sitting on the sidelines will jump in. Krauth said that he sees silver prices back in the low $20 range by mid-next year and in the high $20 range by the end of next year.
"We are going to look back and see the current price as a bargain," he said.
For Investors looking to build a silver portfolio, Krauth said they should hold 10% in the physical metal, 50% in large silver producers and royalty streamers, 20% in developing producers that are looking to build mines and 20% in junior explorers.
"When you look at the equities, you don't have to take huge risks in your portfolio; there are a lot of senior producers that have outstanding returns," he said. "Like the physical metal, mining stocks have been so beaten up that there is a lot of value in the marketplace."