Olivier Le Moal/Adobe Stock
Early this year, the silver market was going through a tough time.
Its reaction to the growing pandemic was in stark contrast to that of gold. The disconnect between the two metals rose to historic proportions, as gold rose on the back of deeply negative real interest rates and expectations, justified or otherwise, of rising inflation as a result of massive fiscal stimulus.
Gold prices surged and silver prices fell as the industrial prospects for the cheaper sibling collapsed around the world.
Despite making some recovery, silver prices have risen some 20% since March, Silver is still estimated to have as far again to go, according to Goldman Sachs as quoted by Reuters.
Over the past 20 years, silver prices have closely tracked an equally weighted basket of the continuous commodity index and gold prices, SeekingAlpha observes, by virtue of having a foot in both camps as both an industrial and monetary metal. The strong gains seen in gold over recent months and the bounce in the broad commodity complex have supported silver, but it still remains deeply undervalued on this basis.
Silver’s case, apart from it underperforming its historic average, is the potential for it to be boosted by: the growing Chinese recovery driving demand for industrial consumption (particularly electronics and plating), its attractions as a safe-haven investment and supply constraints due to COVID-19 mining-related disruptions in Central and South America.
One arbitrage doing the rounds these last few months was to sell gold and buy silver, largely on the historic disconnect between the two prices as gold soared and silver collapsed. But with economic activity improving and supply-side concerns not going away, silver’s continued rise has better prospects, regardless of the trajectory for gold or the fact the historic connection between the two has partially recovered.
Goldman sees gold approaching $2,000 next year and, if it were to break that level, then to rise further. Long positions in the gold market, however, are already substantial, and the bank sees upward momentum slowing as the global economy recovers slowly and risk aversion eases.