Silver didn’t get the push it needed to outpace the rise in gold last year, as some analysts had expected, but good things come to those who wait.
“Many of silver’s key drivers that painted a bullish picture last year are still in play for 2018, particularly rising inflationary pressures and a weaker U.S. dollar,” says Maxwell Gold, director of investment strategy at ETF Securities.
Even so, silver futures SIK8, +2.55% have lost more than 4% so far this year as of Monday, trailing gold’s nearly 0.8% climb. In 2017, gold gained nearly 14%—roughly double the rise for silver. Silver closed Monday at $16.412 an ounce.
Brien Lundin, editor of Gold Newsletter, says he expected silver to top gold last year and this year, but that hasn’t happened because the rally in gold hasn’t had “the kind of consistency…necessary to lead investors to look to silver for additional leverage.”
That will come, he says, given his expectation for further declines in the U.S. dollar on the back of “recent signs of rising inflation and the fact that we’re in the back half of the [Federal Reserve’s] tightening cycle.” Other central banks look poised to begin tightening monetary policy, he says. A weaker dollar will translate into “upward pressure on gold and, eventually, as this trend becomes apparent, greater gains for silver,” says Lundin.
Demand will also play a big part in silver’s climb.
“Silver demand from industrial applications is expected to grow mainly from [electric vehicle] and photovoltaic applications, as silver has excellent electrical conductivity properties,” says Will Rhind, chief executive officer of exchange-traded fund company GraniteShares. Photovoltaic panels collect solar energy. “With continued global economic growth, continued EV demand and a weakening dollar, silver has the potential to perform well in 2018 and potentially outperform gold,” he says.
A report from the Silver Institute released in January shows that demand for the white metal from industrial applications is the largest component for silver offtake, representing 60% last year, and it’s expected to continue to grow this year. Worldwide silver demand for photovoltaic applications, particularly in solar panels, reached an estimated 92 million ounces in 2017.
“We expect the growth to continue this year and set another record for silver demand, driven by large-scale solar capacity additions and continued strong demand uptake from individual households, particularly in China,” the report says.
Analysts also point out that the gold-to-silver price ratio, which measures the amount of silver ounces that can be exchanged for one ounce of gold, is historically high, suggesting a bargain in silver.
Silver “remains relatively cheap compared with gold,” with the gold-to-silver ratio at about 80, versus a historical average of 60, says ETF Securities’ Gold. “Silver may play catch-up, spurred by bargain buying among retail and ETF investors.” The silver bullion-backed iShares Silver Trust ETF SLV, +2.20% has lost more than 3% year to date.
Adrian Ash, director of research at BullionVault, says that silver’s “failure to rise with gold so far in 2018 means that silver is touching extreme levels, in terms of the yellow precious metal.” The gold-to-silver ratio makes “gold very nearly as expensive as it has been any time in the past 25 years,” he says.
He also points out that over the past 50 years, silver and gold prices have gone in the same direction on 71% of all trading days and the two metals have moved in the same direction in 74% of the months since 1968. Given that, “if you’re bullish on gold, history says you should expect silver to rise, too,” says Ash.
And even after last year’s disappointing performance for silver, Lundin believes that prices will climb above $18 an ounce this year and “perhaps significantly higher.”
That said, he also warns of a possible dip to the mid-$15 range, particularly if the 10-year Treasury yield hits 3%. “Breaking that benchmark would likely lead to short-term havoc in risk assets, leading investors to sell the metals to meet margin calls,” Lundin says.