Silver has underperformed in 2017 with weak investor demand. Gold has been the choice metal for defensive plays, while a rally in equities has overshadowed silver’s cyclical qualities…….
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– In 2018, we expect silver to play catch-up, while gold remains broadly flat.
– Continued strength in the industrial cycle and a constrained mine supply would keep the metal in a supply deficit.
– We expect silver’s fair-value at end-2018 to be US$18.5 to 19.5/oz.
In our gold outlook published in December 2017, we wrote about why we think gold will remain flat in 2018. While there could be upside surprises for inflation (gold price positive), rising interest rates and an appreciating US dollar (both gold price negative) would leave gold prices broadly flat. Silver, on the other hand may rise as industrial demand continues to increase and silver plays catch-up with gold after a year of under-performance.
Silver tied to gold?
Our silver model ties the performance of silver to gold. Over the past five years, monthly silver returns have had an 83% correlation with monthly gold returns. However in 2017, silver severely underperformed gold. Gold rose 10% in 2017, while silver ended the year almost exactly where it started. Gold seemed to have benefited more than silver from periodic bouts of rising geopolitical risk. A continued rally in cyclical assets such as equities diverted investor attention away from silver. Silver exchange traded products saw only 6.2 million troy ounces of inflows in 2017. That is less than a seventh of the inflows seen in 2016. By end of December 2017, net speculative longs in silver futures fell to 3545 contracts, the lowest since October 2014. It appears that silver did not benefit from its correlation with gold nor could it leverage off its cyclical status.
The gold to silver price ratio remains elevated.
Even though gold prices will likely be flat in 2018, we think that silver has some catching up to do.
Our silver model includes a proxy for industrial demand for silver. With more than 50% of silver being used in industrial applications, silver shares many traits of industrial metals, while gold operates more like a monetary asset.
Global Manufacturing Purchasing Managers Indices (PMIs) have been rising over the past year. Developed markets are growing at a faster rate than developing markets. We expect some further gains in global PMIs as developing countries gather momentum, with beneficial spill-overs from developed nations. We think the PMI index will rise to 55.0 to 55.5 at the end of 2018 from 54.5 in December 2017.