In this publication: Silver prices have underperformed gold this year, but they have recently caught up. It is unlikely that this catch-up will resume before the end of 2020, because we expect weaker global growth and weaker global trade. But there is a limit to relative silver price weakness compared to gold.190823-Silver.pdf (210 KB)
Since the start of this year silver prices have risen 10% versus the US dollar and 13% versus the Chinese yuan and the Indian rupee. Despite the strong rise in silver prices, their overall performance has been rather disappointing. Gold prices have considerably outperformed silver prices. As a result the gold/silver ratio has risen to new highs. The deterioration on global growth and global trade has dampened silver prices. However, recently there has been a catch-up. Since mid-July there was a strong rise in silver prices, while gold prices barely moved. We think this was triggered by two developments. First, consumers in India wanted to buy silver before the new import tariffs became effective on 1 August. The import tariffs were raised from 10% to 12.5% for both gold and silver. Second, the gold/silver ratio moved to levels last seen in 1992. This ratio has already been high for years but it was at extreme levels in mid-July, when the ratio hit 93, i.e. gold was 93x more expensive than silver. This looks to have been a clear opportunity to load up on silver.
Silver prices to underperform gold prices, but there is a limit
In the near term we expect silver prices to decline. We expect a further deterioration in our outlook for global growth and global trade. We have below consensus forecasts for economic growth in the eurozone and the US. We expect the Chinese and Indian economies to weaken as well. Next to that we expect weaker global trade. Industrial demand accounts for more than half of total silver demand. Jewellery demand is around 20% of total silver demand. If the global economy and global trade slow further (we don’t expect a recession), this will weigh on silver demand and the outlook for silver prices. In addition, we expect profit taking in gold prices and this should also drag silver prices lower. So for the remainder of this year, silver prices will likely underperform gold prices. But there is a limit to silver’s underperformance to gold. We think that a gold/silver ratio above 90 is unsustainable, that silver is cheap, and that net-positioning is not extreme (as in gold).
For 2020, we don’t expect a material improvement in the outlook for global trade and in the global economy. We think most of this will already be reflected in silver prices though. In 2020, silver prices will likely follow gold prices higher again, mainly because of monetary policy easing by central banks, and an increase in the amount of negative yielding debt. With silver prices following gold prices in an environment of weak economic fundamentals, gold prices will likely outperform silver prices. From the moment that global trade and global growth start to recover and provided central banks remain accommodative, we think that silver prices will start to outperform gold prices. A weaker US dollar will also support gold and silver prices. This is more likely to happen in 2021, though.