Recent significant profit-taking in gold has had a pronounced impact on silver prices, but market volatility appears to be subsiding as expectations grow for Federal Reserve interest rate cuts by the end of the quarter.
Commodity analysts at Bank of America, led by precious metals expert Michael Widmer, forecast that silver will regain its footing and potentially outperform gold once more. Despite silver’s inherent volatility due to its smaller market size, Widmer’s report suggests that silver has robust fundamental support.
Widmer highlighted that while 3-month implied gold volatility is roughly half of silver’s, gold risk reversals have shown periodic rallies before retreating, given the Fed’s reluctance to initiate an easing cycle. In contrast, silver’s risk reversal has been climbing since spring, indicating a stronger fundamental outlook for the metal.
As gold prices recently climbed back above $2,400 per ounce and silver tested resistance around $29, the gold-silver ratio reached a two-month high of 86.79 points. However, the momentum is shifting towards silver, with the ratio currently at 84.3 points.
Bank of America anticipates that silver prices will average about $28 per ounce this year, with a significant increase to $34.50 per ounce projected for 2025. Widmer expects the gold-silver ratio to decline by an additional 10 points by year-end, predicting silver will outperform gold driven by increasing industrial demand.
The supportive backdrop of a weaker U.S. dollar and declining rates benefits both precious metals, but Widmer believes that a rebound in industrial production next year will favor silver. The growing demand for green energy, particularly in solar technologies, is expected to further drive silver consumption.
China remains a key player in this demand surge. Widmer noted that China’s silver consumption has increased due to higher usage in the solar industry, while domestic production has slowed. The country’s import backdrop has also improved, with the U.S. and Japan increasing their silver purchases.
The China Photovoltaic Industry Association (CPIA) reported that China’s solar photovoltaic sector consumed 220 million ounces of silver last year, accounting for 18% of global demand. The CPIA projects continued solid growth in silver consumption for the current year.
However, supply issues are also a factor. Despite stable inventories keeping silver prices range-bound between $23.50 per ounce from 2020 to the first quarter of 2024, the mismatch between supply and consumption is becoming more apparent.
