Silver Set to Shine Next Year, Says Citi

(10/13/22 - Tim Treagold)

Silver’s 25% fall since March to around US$19 an ounce has rattled confidence in the poor man’s gold, but a series of signals point to a bounce next year with Citi, a leading investment bank, penciling in a possibly return to US$25/oz.

That price forecast is the peak in the bank’s probability-based assessment of silver, with US$22/oz more likely in the first half of next year.

Whatever the result, Citi’s view of silver is that over the next three-to-six months the metal should “provide an excellent buying opportunity.”

However, the bank’s analysis comes with a warning that tough background conditions, including a strong US dollar, could see silver fall further in the short term, perhaps to a low as US$16/oz before rebounding.

Gold-silver ratio

A second sign that silver could rise next year is the move above 80 by the gold-silver ratio (GSR), an unsophisticated measure, which compares the price of an ounce of silver against an ounce of gold.

Believers in the GSR, which is a number derived by dividing the price of an ounce of gold by the price for an ounce of silver, argue that a high number is a positive sign for silver whereas a low number favor investment in gold.

Not everyone accepts the GSR because of its simplicity, but at current prices of US$1,666/oz for gold and US$19.14/oz for silver the ratio is 87.

At its simplest, the GSR tells an investor that silver looks cheap relative to gold.

India demand

A third signal is strong physical demand for silver in India – traditionally one of the big markets for precious metals and with gift-giving festival season on the way demand from this country could rise further.

For investors, the appeal of silver lies in its close relationship with gold, which is the precious metal trend-setter. But silver also appeals for its roles in a number of fast-growing industrial applications including electronics and the photovoltaics, which underpin rooftop solar panels.

Safe haven buying was the reason for this year’s silver price surge, which took it up to a 12-month peak of US$26.17/oz in early March, shortly after Russia invaded Ukraine, a time when gold also rose sharply to briefly trade above US$2,000/oz.

Back then, in a deeply confused market for most financial assets, the GSR was sitting below 80, a reading which favoured gold compared with today’s GSR of 87 which favours silver.

Not all banks see silver as moving back to the high prices of earlier this year. Goldman Sachs, for example, has silver sticking to a price of around US$19.40/oz for the rest of this year before moving back over US$20/oz in 2024.