(Kitco News) - Despite the recent selloff, the silver market has seen a solid start to the year, and while the price action is expected to be volatile this year, the Silver Institute expects to see higher prices as silver demand is forecasted to reach new record levels.
In a commentary published Wednesday, the Institute said it looks for silver prices to average 2023 around $23 an ounce, representing a 6% increase from last year's average price of $21.70. The comments come as March silver futures currently trade at $22.31 an ounce, up 0.6% on the day.
"This year, we have a cautious outlook for the silver price. This is based on our view that, even if the interest rate hike pace slows, the hikes will continue through to the middle of this year, and potential rate cuts (if any) will be marginal. U.S. inflation will also ease materially due to high base effects, which will see real interest rates rise, weighing on silver and precious metals. Furthermore, the dissipation of recession fears should encourage investors to become more risk-on, to the benefit of equities over silver and gold," the analysts said in the note.
While the Silver Institute may be "cautiously" bullish on silver, the analysts said there is enough uncertainty in the global economy to pose challenges for the grey metal.
The Institute said that healthy demand for silver, while down from last year's record levels, should continue to support persistently higher prices.
Global silver demand is expected to total 1.15 billion ounces this year, down slightly from last year's record high of 1.24 billion ounces.
"However, even at that level, it will still be the second-highest global silver demand level on record," the Silver Institute said.
The silver market is expected to be driven further by growing industrial demand. The report said that industrial silver fabrication is expected to increase by 2.6% to 550 million ounces this year. Solar power demand remains a critical sector for the silver market.
"Silver industrial demand should be lifted from further gains in vehicle electrification, and governments' expanding commitment to green infrastructure," the Institute said. "Photovoltaic silver offtake is set to achieve a new peak this year. The Russia-Ukraine war has accelerated the deployment of renewables as governments strive to lessen their reliance on fossil fuels."
Meanwhile, the Silver Institute has a more subdued outlook for silver investment demand, which it expects to fall 16% this year from last year's record high of 352 million ounces.
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"This year's forecast of 295 Moz would still be the third highest total on record," the report said.
However, the analysts added that the outlook could change if silver prices stabilize around current levels.
"The lack of volatility may encourage some retail investors to shift to alternative asset classes," the analysts said.
As demand remains strong, the Silver Institute noted that the market is still projected to see a significant supply/demand imbalance with another deficit on the horizon even as production increases. Silver production is expected to hit a new record of 1.055 billion ounces this year, a 4% increase from 2022.
"In 2022, the deficit then surged to a record high of 253 Moz. This year, although the deficit is expected to decline, at a projected 119 Moz, it will still be exceptionally high," the analysts said.
