Silver – Commodity Analysis and Forecast

(Thomas Mak and Farzan Faizeen)  

2020 facilitated a revival for precious metals like gold and silver. With silver hitting a six-year high of $26 an ounce in Q3 2020, it reflects the general market concern of Federal Reserve’s stimulus package could increase the rate of inflation, for which precious metals are often regarded as popular inflation hedge for central banks because the countercyclical nature of precious metal prices in turn enables them to thrive during economic downturn. By analysing the supply-and-demand dynamic of the silver market, it would enable investors to develop a better understanding on the bullish outlook of silver.    

Fundamental analysis 

According to the World Silver Survey, global mine production is expected to decrease by 5% to 797moz this year. This created a knock-on effect on supply efficiency as global silver supply is forecasted to fall by 4% to 978moz – the lowest level since the 2008-09 Financial Crisis. Such low level of supply can be attributed to the repeated extension of national lockdowns at the second largest silver producer in the world – Peru. The Peruvian Ministry of Mines and Energy has predicted that the overall production level in 2020 is set to fall to the lowest point since Q2 2015.  

Apart from supply disruptions, strong investment and industrial demands also played an important role in consolidating silver’s bullish outlook in Q3 2020. With debt levels rising rapidly due to the adverse economic impact of COVID-19, central banks responded by injecting liquidity into the markets through generous stimulus packages and interest rate cuts. Due to the unprecedented amount of liquidity being released into the markets, investment demand would in turn increase because institutional investors like central banks would be eager to purchase silver exchange-traded products (ETPs) to manage the risk of rapid inflation. It is our provocation that silver will break the $30 resistance level in the next quarter as the Federal Reserve seeks to keep interest rates low and industrial demands continue to increase.  

The ongoing pandemic has increased the industrial demands for silver. Primarily because silver is used as a catalyst in ethylene oxide, which is a vital chemical component for medical products like gloves and face masks. In addition, silver’s industrial usage in solar panels is another push factor that drives silver demands.  

(Source: Bloomberg) 

Silver is a primary ingredient in photovoltaic cells, which is an electric device in solar panels that converts light into electricity. As we can see from the graph above, solar power output in China has been subjected to a steep increase since February 2020, which is a positive signal for silver investors because the rise of output indicates that silver demands will remain high as China continues to compete with the U.S. over clean energy development. Wood Mackenzie, one of the leading data analysts in the field of renewable energy, forecasts a 33% increase in residential and non-residential solar panels installation in 2020 – another positive market signal that can sustain silver demands.  

Technical analysis 

(Source: Tradingview.com) 

The Q3 2020 surge in silver has seen the commodity price action favouring the bulls as silver sought to break the 30.00 resistance level in August. However, the breakout was short-lived as silver fails to stay above the 30.00 resistance level. This can be attributed to the fact that Republicans’ COVID-19 relief bill failed to pass through Senate, which put a pause on the U.S. Government’s effort to release more liquidity and monetary easing into the market, thereby reducing silver’s investment demands because the risk of rapid inflation has been mitigated.  

Moreover, another significant aspect of the EMA graph is that the Stochastic indicator is remaining above 80.00. A high stochastic oscillator reading typically represents that the commodity in issue is trading in overbought territory. Thus, given that the Stochastic indicator is signalling that silver is currently trading at a level that is above its intrinsic value, investors must prepare for the possibility of sudden downturn when the market corrects silver prices in the near future.         

Concluding remarks  

The amendment of Federal Reserve fiscal policies and the speed of post-coronavirus economic recovery will continue to be the key factors affecting silver prices. For the quarter ahead, it is likely that we are going to see political friction continues to amplify as Trump and Biden battle for presidency, which can in turn lead to timeline for fiscal policy support being push back. For investors, it is important to remember that investment demands for silver would decline if the threat of rapid inflation is minimal.  

Nonetheless, we predict that silver’s safe haven appeal would remain strong amongst retail investors. When silver reached its six-year high in Q3 2020, it was still 70 times cheaper than gold. Thus, for retail investors that got priced out of gold but want to take advantage of precious metal’s rapid price growth during economic downturn, silver is certainly an attractive and cost-effective option.  

Industry jargons definitions:  

Inflation hedge: An investment that seeks to protect the decreased purchasing power of a currency that results from the loss of its value due to inflation and/or other macroeconomic drivers e.g. fiscal stimulus measures, negative global economic outlook, rise of unemployment.  

Exchange-traded products (ETPs): A regularly priced commodity which trades during the day on an exchange market e.g. LME, London Metal Exchange.  

Exponential Moving Average (EMA): Under the Moving Average family, EMA places a greater emphasis on the most recent data points. In addition, EMA seeks to smooth the price data available to form a trend indicator and define the current trend/direction.  

Stochastic indicator: A momentum indicator that uses support and resistance level to highlight price movements and growth potential.  

Overbought territory: In a stochastic oscillation graph, a reading above 80.00 is regarded as overbought, which is a sell signal because it represents that the commodity in issue is trading above its intrinsic value.  

Bibliography

Da Costa, T.  

2020. Silver Price Forecast: Silver Sideways as Price Action Seeks Direction. Dailyfx. pp. 1-2.  

Dizard, J.  

2020. Where there’s a silver tip, there’s a silver tap. Financial Times. pp. 1-3.  

Efanova, D., Wilkes, G.  

2020. Quarterly Metal Reports: Analysis and Forecasts for Base Metals, Precious Metals, Iron Ore & Steel. Sucden Financial. pp. 2-26.  

Ministerio de Energia y Minas.  

2020. Invest in Peru: Mining Potential. The Peruvian Ministry of Mines and Energy. pp. 1-6.   

Sanderson, H.  

2020. Silver outpaces other global assets in best month since 1979. Financial Times. pp. 1-2.  

The Silver Institute.  

2020. World Silver Survey 2020. Silver Supply in 2020. pp. 1-86.   

Venketas, W.  

2020. Silver Price Forecast: Potential Breakout Looming for Spot Silver. Dailyfx. pp. 1-2.  

World Bank Group.  

2020. Commodity Markets Outlook: Implications of COVID-19 for Commodities (April 2020). World Bank. pp. 1-47.   


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