Four charts show why silver’s surge is set to fade

Silver’s on a slippery slope as the unwinding of pandemic-era stimulus and industrial disruptions from the global energy crisis threaten recent gains.

The metal is poised for the first monthly advance since May, alongside gains in gold, on concerns that power shortages and supply-chain snarls will keep inflation persistently high. The Federal Reserve has indicated it’s likely to start reducing bond purchases to tame price pressures, which could diminish silver’s appeal.

The Fed tapering and potentially lower inflation expectations, the easing of Covid-triggered supply chain woes, and uncertainty over how the power crunch this winter could impact the energy transition will have a negative impact on silver, according to Aakash Doshi, an analyst at Citigroup. Whether or not China has a soft landing from its current energy crisis will also be crucial to silver’s price outlook as the metal is more leveraged to manufacturing activities there, Doshi added.

The bank forecasts silver to average between $19 and $20 an ounce next year, from an average of $25 for this year. UBS Group estimates $19 in the second half of 2022, on potential outflows from silver-backed exchange-traded funds. Spot silver is currently trading around $24.

Still, silver’s other role as a key commodity in solar panels and electronics is likely to buoy prices over the longer term. Industrial use probably reached a record this year, according to London-based research firm Metals Focus, which forecasts even stronger demand to come and expects prices to hold around this year’s average of about $25 in 2022.

“In the long term, there is a positive trend in demand as the world moves into carbon neutrality,” said Bart Melek, global head of commodity strategy at TD Securities in Toronto. “This means a lot more silver is likely going to be used than it was before.”

Here are four charts to watch:

Real rates
Silver has had a rocky year. A retail-investor buying frenzy in February sent prices to an almost eight-year high as it became the focus on a Reddit forum. But those gains have steadily eroded, and the metal is now down about 9 per cent in 2021, making it one of the worst-performing major commodities.

“Elevated inflationary pressure could keep silver prices well bid in the very short run before higher real rate expectations trigger another price drop,” Dominic Schnider and Wayne Gordon, strategists at UBS’ global wealth management unit, said in a note dated Oct. 25. “A decelerating inflation picture in 2022 should add to a backdrop that supports less negative real rates ahead.”

Inflation hedge
Silver typically performs better than gold when inflation rises, said Citi’s Doshi.

“In the short term, the strong energy prices and tightness in supply-demand balances in oil, gas and petroleum markets are bullish for silver as they’ll buttress macro investor flows into commodities for inflation-hedge purpose,” said Doshi.

Fed policy makers, who have described the recent rise in inflation as largely transitory, are widely expected to announce plans to begin scaling back their bond purchases following their meeting next week, although Chair Jerome Powell made clear that the central bank will remain patient on raising interest rates. Meanwhile, European Central Bank President Christine Lagarde acknowledged price pressures will last longer than anticipated.

Investment demand
Retail investment remains strong, especially in the US and Germany, said Philip Newman, a managing director at Metals Focus. That could help offset reduced institutional investor interest. Holdings in silver-backed ETFs have dropped from an all-time high earlier in 2021, although they remain elevated compared with previous years.

Still, investor demand for silver could rebalance moving into 2022 if growth stagnates amid high inflation, said TD Securities’ Melek.

Technical signals
Silver’s slump in September to the lowest since July 2020 resulted in a so-called polarity test, where prices find support at a level where there was former long-term resistance. Since 2007, several tests of this zone have led to reversals, including in September last year, after which prices rose to just above $30 in February. Prices have rebounded 12 per cent from last-month’s low.

Silver’s overall outlook will ultimately depend on the global recovery from the pandemic, monetary policy and gold’s path.

“We believe several risks still exist: the potential for new waves of the virus, ongoing supply-chain disruptions and rising energy prices, all of which could undermine economic growth prospects,” said Metals Focus’ Newman. “This in turn could result in an equities correction, to the benefit of gold, and, by extension, silver.”