(Kitco News) - A perfect storm is once again brewing in the silver market as persistent industrial demand continues to outpace supply, potentially driving prices back to a key resistance point.
Gold remains stuck in neutral as rising inflation fears drive expectations for interest rate hikes; however, silver’s industrial profile is starting to overshadow its role as an important monetary asset.
Silver’s rally above $88 an ounce comes as copper prices trade at record highs. July high-grade copper futures last traded at $6.70 a pound, up more than 2% on the day. Meanwhile, spot silver last traded at $88.30 an ounce, also up 2% on the day.
In a note Tuesday, Elior Manier, Market Analyst at OANDA, said that in the current environment, silver has room to test resistance at $90 an ounce.
“Normally, silver follows Gold’s moves, but this time, the strong bounce suggests there is real demand and strong buying interest focused on alternative metals instead,” he said.
Analysts note that demand for industrial metals like copper has been fairly stable, but prices are being driven by the ongoing war in the Middle East, which has impacted the global supply chain for sulfur. Sulfuric acid is a critical component in base metal production.
The weaker production landscape also impacts silver, as it is often mined as a byproduct. If less zinc, copper, and aluminum are produced, then less silver is also produced. Analysts note that this will put further pressure on the silver market, which is expected to see its sixth consecutive annual supply deficit this year.
At the same time, analysts note that renewed economic activity in China remains a key source of support for silver and other base metals.
“While recent CTA buying has tapered off, there is evidence of a renewed bid in the Middle Kingdom,” said commodity analysts at TD Securities. “Top traders on the SHFE have been steady buyers of silver over the past month. Chinese premiums have remained strong, and the import arb has been open at various times in the last couple of weeks, suggesting Eastern demand may be the catalyst supporting the upside.”
Julia Khandoshko, CEO of the European broker Mind Money, said the ongoing energy crisis caused by the war in Iran will create further demand for alternative energy, and silver is a critical metal needed for renewable energy, as well as new electric cars.
Despite some volatility in the market, Khandoshko said that silver remains in a phase of long-term growth.
“Silver is increasingly being driven by more than just investor sentiment, with supply constraints, logistics disruptions, and green-energy demand all shaping the market,” she said.
David Morrison, Senior Market Analyst at Trade Nation, said that although rising interest rate expectations supporting a strong U.S. dollar present a headwind for silver, it is difficult to ignore the momentum in the marketplace. He added that if prices break above $90, traders and investors could start targeting January’s record highs at $120 an ounce.
“The daily MACD has turned up sharply, suggesting an increase in upside momentum,” he said. “Still, much depends on President Trump’s talks with Xi Jinping in China tomorrow, and whether this could lead to a resolution of the U.S. war with Iran, among other issues.”
