Silver Price to Bounce Back Strong Next Year After Lackluster 2017

(December 21, 2017 - by Neils Christensen)

Silver investors will soon be able to close the book on what can only be described as a dismal year for the grey metal. According to some analysts, 2017 has been a roller-coaster ride for silver as prices started the year strong on high optimism; the market was coming off a more than 16% move the year before. However, those hopes were dashed by the summer as the price fell to a 1.5 year low.

Silver’s continued underperformance in the precious metals space has pushed the gold-silver ratio to its highest level in more than a year. Kitco.com shows the gold-silver ratio holding at an elevated level of 78.02 points. The historical average for the ratio is around 60 points.

Heading into year end, silver is struggling to hold above the key psychological level of $16 an ounce, up less than 2% since the start of the year. Ahead of 2018, analysts are once again optimistic that renewed industrial demand can push silver out from under gold’s shadow.

“We are finally beginning to see evidence of silver industrial demand picking up with strong global growth, as the impact of both thrifting and substitution appear to fade. Therefore, strong global growth should, in our view, lead silver to outperform gold, as it has in previous expansion phases,” said analysts at Goldman Sachs in a report published Monday. Goldman sees silver hitting $17.20 an ounce by the end of 2018. The analysts aren’t alone in their bullish outlook for the Grey metal. Almost all major Canadian banks, including Bank of Montreal (BMO), TD Securities (TDS) and CIBC see silver outperforming gold. In a report in November, TDS said that going long silver was their main trade for 2018, with a target of $20 an ounce. “Underperforming silver is set to shine as gold improves amid still low real rates, firm demand, weak supply and higher [volatility],” they said.

BMO looks for silver to rise to $19 an ounce in 2018, averaging the year around $17.78 an ounce, with a long-term forecast of $20 an ounce.

Commodity analysts at Commerzbank are expecting silver prices to average $17.25 an ounce next year, with the biggest gains seen by the fourth quarter. They said that they are optimistic on the precious metal because of higher industrial demand and falling supplies. “Global silver supply is set to stagnate at [1 billion] ounces,” they said. On the supply side, many analysts are expecting mining companies to cut back their silver production next year as prices remain fairly low.

In a recent interview with Kitco News, Darren Blasutti, CEO of American Silver said that his company is focusing its production on higher-priced zinc and cutting back on silver production.

He added that the company’s plan is to preserve their silver reserves until prices turn around. “We don’t believe in producing silver without making any money,” he said. “Long term, I’m bullish on silver because there will be less and less silver coming to production.”

Supply Is Falling But So Is Demand

While global mine supply is not expected to see a material change next year, the market still needs to deal with weak investor demand, especially physical demand.

This past year saw physical silver demand fall to multi-year lows, despite strong industrial demand. According to statistic from Thomson Reuters GFMS and the Silver Institute, industrial silver demand grew by 3.4% to 581.4 million ounces, but at the same time demand for bars and coins slumped by more than a third to 130.1 million ounces, the lowest figure since 2009.

Overall physical silver demand in 2017 has fallen by almost 5%.

But it’s not just weak bullion demand impacting the market. Maxwell Gold, head of director of investment strategy at ETF Securities noted that the market is struggling with weak investor demand in exchange-traded products.

The investment firm said that as of last month, ETF demand is down 1.2% for the year at 20,049 tonnes.

However, Gold expects the headwinds that silver faced in 2017 to dissipate next year as they see the price rising to $19 an ounce in the first half of 2019.

“Silver tends to get lost in gold’s shadow, and this year appears no different. Silver continues to underperform gold prices, but silver may be setting up to be a leader next year,” he said. “Many of silver’s key drivers remain bullish for the white metal, including rising global manufacturing and industrial production, rising producer inflation and elevated consumer inflation, and strong investor sentiment.

Silver Needs To Go Lower To Break From Gold

In a recent interview with Kitco News, Simona Gambarini, commodity economist at Capital Economics, said that silver prices probably have to fall lower in 2018 as U.S. monetary policy normalizes before investors taken an interest in the precious metals’ positive supply and demand fundamentals.

“Normally, silver should outperform gold when global [Purchasing Manager Indexes] start to rise,” she said. “However, monetary policy and a stronger U.S. dollar are having more impact on gold, which is dragging silver lower,” she said.

That normalization could start at the end of 2018, when Capital Economics expects the Federal Reserve to end its new hiking cycle, after four more interest rate hikes.