Silver set for lacklustre gains in late 2018

The following is an edited release by precious metals consultancy firm Metals Focus, coinciding with the publication on June 7 of Silver Focus 2018, its flagship annual report that features comprehensive historical supply and demand statistics, and a detailed 2018 forecast. Visit www.metalsfocus.com for more information.

After a disappointing 2017, the lacklustre tone for the silver price has largely continued so far this year, moving broadly sideways in a US$16 to US$18 per oz. range.

To a large extent, this has been a function of range-bound conditions in gold which has seen a general lack of institutional investor interest. In particular, a positive macroeconomic backdrop, rising bond yields and subdued inflation have all weighed on the precious metals complex.

In addition, short-lived weakness in equities earlier this year failed to dent investor sentiment — a stance that was reinforced by a strong earnings season in the United States.

For 2018, we expect the challenging environment for silver to persist over the near-term.

Despite this, Metals Focus expects conditions across global financial markets will become more supportive for precious metal prices later this year. For example, political developments in Italy, periodic spikes in geopolitical tensions and the potential for a destabilizing trade war should all boost sentiment towards precious metals.

As a result, silver is likely to spend the last few months of 2018 trending upwards. This in turn will see the full-year average price rise 2% year-over-year to US$17.40. As such, we believe a venture above US$20, even if only short-lived, is likely during the final quarter of this year.

The forecast is also based on the premise that the downturn in the U.S. dollar will resume later this year, driven in part by expectations of a tightening monetary policy in the eurozone. In the U.S., we could see a further flattening of the treasury yield curve, which would be bearish for the greenback.

Another positive factor for precious metals is the outlook for equities, particularly U.S.-based stocks, as economic growth in the U.S. loses momentum. After notable gains over the past few years, volatility is likely to re-emerge, and sharper moves could become more frequent. This could lead to diversification in favour of precious metals, which should also include silver.

Third, we believe that real, short-term interest rates will remain negative across major currencies for the rest of 2018 and beyond, lowering opportunity costs of holding zero yielding assets, including precious metals.

Silver should also, at times, benefit from geopolitical developments. Trade-protectionism will raise concerns about global, and, in particular, U.S. economic growth, and these tensions could spill over into other geopolitical issues. In Europe, the troubled state of Italian politics is a wildcard. The new populist government is likely to follow a path of fiscal imprudence, which could fuel a new eurozone debt crisis and trigger a political crisis in the European Union. Ultimately, this could boost the appeal of safe haven assets.

Looking finally at silver’s fundamentals, physical investment is forecast to improve 6% this year, but this compares with 2017’s historically low total. Other key areas of silver demand — industrial, jewellery and silverware — will also grow, but each by a sluggish 1%. All of these gains will partly offset a 1% rise in mine production.

As a result, 2018 is expected to see another year of oversupply, albeit less so than during 2016–2017. This means that professional investors will once again be called upon to absorb a considerable level of excess supply in 2018 (forecast at 37.2 million oz., or 1,158 tonnes).

Given the aforementioned macroeconomic and geopolitical backdrop, there is plenty of scope for these fresh investment inflows into silver to emerge later this year, especially among institutional players.