(Kitco News) - Last week, Bank of America upgraded its gold forecast as demand in all segments of the marketplace remains robust, but the analysts are not as optimistic about silver.
Bank of America remains bullish on silver and expects prices to average around $35 an ounce this year; however, it warns that investors could be disappointed if they expect silver to outperform the yellow metal.
Although gold prices have pushed solidly above $3,100 an ounce, silver has struggled to hold gains above $34 an ounce. Spot silver last traded at $33.79 an ounce, up 0.33% on the day.
Looking at the broader landscape, the gold/silver ratio is currently trading near a two-year high above 92 points, meaning that it now takes 92 ounces of silver to equal the value of one ounce of gold. The historical average for the ratio is around 60 points.
While silver has room to run higher, analysts at Bank of America expect the gold-silver ratio to remain elevated.
“We remain bullish gold but would avoid positioning for mean-reversion in gold-silver spreads as we do not find co-integration,” the analysts said in the note.
Many analysts have noted that in a traditional precious metals bull market, silver typically outperforms gold as prices are driven by rising inflation, falling interest rates, and falling real yields. But Bank of America noted that this rally is different.
“Recently central bank buying has emerged as the primary catalyst behind the current gold price increase. Many emerging market banks have also ramped up gold purchases, concerned that traditional ‘safe assets’ such as the US dollar and the US treasuries are not safe from the risk of freezing or confiscation,” the analysts said. “Meanwhile, silver is less suitable as a reserve asset as it is harder to store. In fact, the central banks have recently been net-sellers of silver and its demand is primarily driven by the industrial applications.”
Although gold and silver have followed similar trajectories over the last three decades, the analysts said that their research shows there is little cointegration between the two metals, which means investors shouldn’t expect to see any mean reversion in the price ratio.
“When we perform the cointegration tests on the gold-silver pair, out of all monthly regressions from January 1996 to date, only 20% pass the test. In other words, we determine that the gold-silver pair is cointegrated only 20% of the time,” the analysts said.
At the same time, Bank of America did find instances of high cointegration during times of market turmoil: the Asian market crisis in 1997, the dot-com bubble in 2002, the run-up to the Great Financial Crisis between 2007–2008, and the Federal Reserve’s tightening cycle after the GFC between 2015 and 2016.
However, the correlation between gold and silver broke down in 2020 during the global COVID-19 pandemic and further deteriorated after Russia invaded Ukraine in 2022 and the ensuing Western economic sanctions against Russia.
“The gold rally is likely to continue as countries diversify away from the dollar, especially as the U.S. takes drastic measures to shrink both the budget and trade deficits. Gold is a scarce asset with limited additional supply either through mining or recycling,” the analysts said. “Hence the continued central bank demand that is accentuated by recent geopolitical tensions will likely continue to elicit the price response. Yet we see no evidence of mean reversion emerging in the gold-silver pair.”
Although silver will remain in gold’s shadow this year, analysts believe that the precious metal remains well supported as industrial demand continues to outpace supply growth.
