Silver Can Outshine Gold

by: Giovanni Staunovo and Wayne Gordon

Silver has underperformed gold this year, with the white metal up only 3% and the yellow one almost 11%.

The underperformance relates mostly to weakness in retail investor demand, in our view. Gold also likely benefited from inflows related to geopolitical tensions, given its reputation as a safe-haven asset.

Still, silver continues to take its cue from gold.

The correlation between them remains high at around 0.9, and we expect this trend to continue in the near term. With gold likely to weaken after the Federal Reserve hikes rates in mid-December, we think silver prices might temporarily fall below $16 per ounce.

Longer term we remain more positive on silver, particularly versus gold.

We think the world economy will expand at a solid pace of 3.8% next year, boosting industrial demand (which accounts for 55–60% of total silver demand) by possibly 4–5%.

Silver mine supply, which fell 2% this year, is likely to expand slightly next year on recovering by product supply (equals 70% of the total mine supply, coming from lead/zinc, copper and gold mines).

But the weaker US dollar we anticipate, persistently low US real interest rates and a higher gold price should sustain investment demand. We expect silver to climb to $18.5 per ounce in 12 months.

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