(Kitco News) - There is a lot of focus on gold right now as prices push to within striking distance of $2,300 an ounce; however, one bank is telling investors that silver is the metal to watch.
After underperforming gold in the last month, as the yellow metal hit record high after record high, silver has now started to move. The gold-silver ratio has dropped sharply to 87.6 points on Tuesday but still has a long way to go before hitting last month’s lows at 85 points, much less the historical average in the low 50s.
May silver futures are currently trading at $25.93 an ounce, up more than 3% on the day. Analysts note that critical resistance at $26 could trigger a bigger move for the precious metal.
While technicals are turning bullish for silver, Daniel Ghali, senior commodity analyst at TD Securities, said he expects fundamental factors will create a long-term uptrend for the white metal.
One of the reasons why silver has underperformed gold is because central banks don’t buy it. Gold remains the ultimate monetary metal in global financial markets, making it the go-to safe-haven asset in a world of uncertainty and volatility.
However, silver’s strength comes from its industrial demand, which represents more than 50% of the physical market. Ghali said this represents silver’s most significant potential.
“Silver markets may be set up as the most exciting trade in the energy transition theme across the entire commodities complex today,” Ghali said in his latest research note. “The energy transition is this decade's investment zeitgeist, and implications for silver are often overlooked.”
In January, the Silver Institute published its silver outlook, saying it expects industrial silver demand to increase 4% this year to a record 690 million ounces as demand for solar energy and electric vehicles remain critical pillars of support within the global green energy transition.
Ghali noted that this growth in demand and significant underinvestment in mine supply has created a “universally-recognized structural deficit.” Ghali added that this fundamental imbalance has been largely ignored as markets have focused on massive above-ground stocks instead.
However, Ghali said markets have misjudged just how much silver is available, and this depleted reserve will squeeze prices higher.
“For many years, market participants could safely assume that the behemoth stockpile of above-ground silver would be sufficiently large to satisfy any reasonable scale of demand growth,” Ghali said. “Today, we believe this assumption could potentially be challenged within the next 12-24 months.”
Ghali said that industrial demand, driven by the green energy transition, has completely transformed the silver market. He noted that in 2019, there were expectations that it would take about 165 years to deplete the stockpile of silver.
Ghali saidpp his new two-year target could be accelerated if investors jump back into the market.
“The potential ETF buying activity associated with a typical Fed cutting cycle could dramatically shorten this time span. This poses a significant liquidity risk for silver markets, and makes a legitimate case for a potential #silversqueeze on the horizon,” he said. “Pressure release valves could eventually help the missing silver make its way back to markets, but necessitate higher prices in order to do so. This is an extreme upside convexity trade that is severely underpriced.”
