(Kitco News) - The silver market is struggling to find consistent bullish momentum, as prices have been unable to break above initial resistance at $31 an ounce. However, one international bank sees potential in the precious metal.
Analysts at Société Générale said in a note Tuesday that they see a unique opportunity to go long on precious metals, with a specific focus on silver, while shorting oil.
The analysts noted that the U.S. equity risk premium has dipped below 3%, an event observed only ten times since 1990. Historically, as risk premiums normalize, precious metals outperform, with silver shining the brightest.
Examining these conditions, SocGen noted that gold has seen annual returns of more than 6% when the risk premium normalizes. Silver, however, has achieved annual gains of more than 12%. At the same time, oil prices in this environment have declined by nearly 14%.
“Based on this analysis, we recommend initiating long positions in silver and short positions in oil. This strategy could be implemented immediately, with a rise above the 3% threshold further solidifying our conviction. For silver, we suggest favouring physically replicated ETFs over futures for structural reasons, and given the current disconnect between US futures and the London LBMA spot,” the analysts said in the note.
While the French bank is bullish on precious metals, the trade is not without risks. The analysts noted that the risk premium dropped in 2024 due to expectations that the Federal Reserve would shorten its easing cycle, which has propelled bond yields higher. Currently, markets are pricing in only one rate cut for 2025.
Higher interest rates support the U.S. dollar's strength, creating significant headwinds for gold. However, SocGen argues that this time is different, as gold has managed to hold its ground near record highs even as the U.S. dollar has traded at multi-year highs.
Gold and silver have consolidated in recent months as President Donald Trump’s election victory provided further momentum to the U.S. dollar, but SocGen sees new opportunities for the precious metals.
“With Trump now in office and holding a majority in both the House of Representatives and the Senate, the prospects for ballooning public debt and heightened geopolitical instability are becoming clearer. This high-risk environment is favourable for precious metals but less so for industrial commodities,” the analysts said.
At the same time, SocGen said that silver has underperformed gold and could start to catch up.
“If our prediction holds, and precious metals benefit from the current situation, silver should see a more significant rise than gold, given that silver’s beta to gold is 1.42 when both metals’ prices are increasing,” the analysts said.
SocGen also said it likes silver because the market continues to experience a significant fundamental imbalance, with demand outweighing supply.
On the downside, SocGen said the biggest risk to this trade is China.
“If China’s growth stops disappointing, OPEC+ could fill the gap, but oil prices would likely remain high. A portion of the premium on gold is due to Chinese investment in the precious metal. A resurgence in consumer confidence in China could divert investment flows from gold to the currently depressed real estate and equity markets,” the analysts said.
