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Silver will outperform gold as industrial demand picks up - BMO

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(Kitco News) - Precious metals prices will see headwinds in the medium term, but a recovery in industrial demand and a burgeoning solar sector should see the gold:silver ratio move closer to its historical average in the coming years, according to Colin Hamilton, commodities analyst at BMO Capital Markets.

Speaking in the latest Metal Matters podcast, Hamilton said that the near-term prospects for silver are being driven by “macro asset allocator positioning, the FED and the USD.” He noted that “silver has had a pretty tumultuous time over the past month,” with the price hitting highs above $25 per ounce before pulling back.

Silver prices broke decisively below $23 per ounce on Aug. 8, and the precious metal has been trading in a range between $22.90 and $22.63 since.

“A softer-than-expected CPI print in the U.S., combined with a relatively weak industrial production reading, has served to temper expectations for future Fed rate hikes,” he said. “Many market participants, including BMO Economics, are now of the belief that economic headwinds will outweigh tailwinds in the coming months, turning a skip in rate hikes at the September meeting into a more prolonged pause.”

Hamilton noted recent comments from Federal Reserve Chair Jerome Powell that strong economic data, while positive, could make reaching their 2% inflation target more challenging and could require further rate hikes. He said this has strengthened the U.S. dollar and created “broad selling pressure” on precious metals.

“In our view, silver could show its usual torque on the downside move compared to gold just in the very near term,” he said, “because while broadly speaking, the global economy is holding up relatively well and better than expectations, this is almost solely down to resiliency in the services economy while the manufacturing side is clearly feeling the strain.”

Hamilton said this sustained weakness in manufacturing is weighing heavily on silver prices. “[T]his disproportionately impacts silver because industrial demand makes up over 50% of total silver demand, as compared to only ~7% of gold.”

He believes that investors’ risk appetite will increase through 2024 as markets become convinced that the worst economic news is behind them and as the Fed’s interest rate direction becomes clearer. “[W]e might see a little bit more money flow out of the precious complex – perhaps out of silver sooner than gold, but eventually we see gold ultimately falling further,” he said.

“Longer term, we have the gold:silver ratio back at 71, which is relative silver outperformance, partly helped by silver’s important role in the global photovoltaic build out, which should help industrial demand grow by about 100Moz per annum to 2030.”

Other analysts also see massive increases in solar demand supporting silver prices beyond 2024, which will drive prices higher and put pressure on supply.

“In 2021-22, silver industrial fabrication hit successive record highs, with volumes in 2022 16% higher than the 2010 total,” wrote analysts at Metals Focus in a recent report.

These highs were driven by the rapid growth of green energy applications such as photovoltaics (PV) and electric vehicles (EV). “This growth, in turn, helps explain why, in the foreseeable future, the silver market is likely to face a persistent structural deficit,” they write.

Following record PV installations in 2022, Metals Focus projects another new high for installed capacity this year. “In the latest global PV market outlook released by Solar Power Europe, the installed capacity forecast for this year has increased significantly by 33% compared with the previous version, and the forecast for 2024 has also increased by 42%,” they said.

“As for the medium term in 2025 and 2026, the adjustments are even higher, at 47% and 54%, respectively.”

Spot silver fell to a low of $22.40 earlier on Monday morning and last traded at $22.56, down 0.45% on the session.

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