Silver price in 2022: how silver can outperform gold in the race to catch up next year

Welcome to the Kitco News Outlook 2022 series. The new year will be marked by uncertainty as the US Federal Reserve tries to reverse and tighten its monetary policy. At the same time, the risk of inflation continues to grow, which means that real interest rates will remain in the low to negative range. Stay up to date with Kitco news to learn from the experts how to navigate turbulent financial markets in 2022.

(Kitco News) There have been many questions about the performance of gold and silver in 2021. However, analysts remain bullish, saying that silver can outperform gold once the bull market starts in 2022.

Both silver and gold had an uneventful year – silver traded 13.5% and gold 4.8% year-to-date.

“Silver didn’t have a life of its own this year, it just fluctuated in the slipstream of gold. In total, it suffered disproportionately high losses compared to gold. As a result, the gold-silver ratio climbed from a good 70 at the beginning of the year to over 80 years, “said Commerzbank analyst Daniel Briesemann.

For the next year, analysts will not be discouraged as the declining sentiment surrounding precious metals is about to shift as the technical charts look healthy and silver is trading cheaply compared to gold.

“Silver is a hybrid. It’s a precious metal with a role in protecting against inflation, but it’s also an industrial metal that has many different uses,” said Tim Hayes, chief global investment strategist at Ned Davis Research (NDR). “We’ll see that it stays that way. Silver hit a multi-year low in 2020. And as weak as it has been lately, it’s still above the 2014 and 2019 lows and hitting higher lows.”

It’s not uncommon for silver to get carried away by gold, said Jordan Eliseo, manager of listed products and investment research at Perth Mint.

“Silver prices plummeted in the first quarter of 2020. We practically saw an event that was only once in a century that saw the gold-to-silver ratio rise above 110. Since then, silver has roared for the last nine months of 2020. It was of course that if gold withdrew, silver would take a breather and make a small correction, ”Eliseo described.

After a correction in 2021, the technical outlook for silver looks promising as investors view it as a bargain versus gold.

“The gold to silver ratio is a lot healthier now. It’s basically 80: 1. It’s nowhere near the extreme we saw in March 2020. Every time the ratio was 80: 1, saw silver relatively cheap, “said Eliseo. “If you go back to the mid-1970s, silver was only a few times cheaper than gold, at a ratio of about 80: 1.”

Check out these key macro drivers for 2022

It will be up to several drivers to trigger a rally in 2022 and silver is paying close attention to inflation hedging and the outlook for the industry.

Analysts said investors should see a reversal of some of the major headwinds holding gold and silver this year, including the US dollar, real returns, strong economic growth and the notion that inflation is temporary.

Many thought 2021 would have been the year of silver and gold due to hot inflation fears. In the US, price pressures reached their highest level since 1982, with an annual CPI of 6.8% in November. But the picture is much more complicated as the inflation driver is unlikely to kick in until next year.

“We’ve seen more money poured into equity strategies this year than in the last 20 years combined. It’s holding back gold and silver. The US dollar index is up around 8% this year, and that’s a natural headwind.” Real returns rose again this year, economic growth exceeded expectations and the market was convinced until two months ago that inflation was temporary, “Eliseo said.

The market already expects inflation to decline closer to 3% within the next five years. “The market is currently pricing a fairly aggressive Fed cut, three rate hikes in 2022 and inflation closer to 2.5% instead of 6.5% in five years,” Eliseo said.

However, gold has done well in the past once the Fed embarks on a rate hike cycle. And silver follows gold. “I wouldn’t be surprised to see if gold has bottomed and moving up once the Fed finishes cutting faster than expected and hikes rates,” noted Eliseo.

Given the valuation of the equity markets, the next decade might not be as lucrative for the traditional 60/40 portfolio allocation. “It is almost inconceivable that these strategies could continue to give back what they have achieved over the past decade. Even investment managers who pursue such strategies tell their clients that the next decade is unlikely to be as rewarding for mainstream financial investments, ”added Eliseo.

Silver’s race to catch up

After a year of underperformance, investors could focus on silver again next year.

“This catch-up is certainly built in. It has fared worse than gold to this day. As a result, investors will switch to the silver market,” said Daniel Hynes, senior commodity strategist at ANZ.

The gold to silver ratio also indicates the potential outperformance of silver, Eliseo noted. “The very fact that the gold-to-silver ratio is around 80: 1 suggests that if gold goes up, at least silver will come along and gold could most likely outperform,” he said. “Silver also benefits when commodities do well overall. When economies perform relatively well, it should benefit from an industrial perspective and from the entire ESG shift that is taking place in the economy.”

Right now, silver is being sold because the gold-volley ratio is close to 80: 1, said Peter Schiff, chief economist and global strategist at Euro Pacific Capital.

“To put that in the right light, the average in modern times was between 40: 1 and 50: 1. Put simply, silver is historically extremely undervalued compared to gold. At some point you should expect this gap to close, ”wrote Schiff. “If that spread widens again, we could expect another big rally in silver.”

Industrial component

The price campaign for silver in 2021 suffered from delivery bottlenecks and significantly increased energy costs, among other things. But the industrial component of silver will also add to the precious metal’s rally over the next year as some of the supply chain problems are resolved.

“The industrial component of the silver market will tend to benefit more against a macroeconomic backdrop, which will still result in above trend growth on a global level. While this is dampening some of the growth rates we’ve seen this year, it certainly is still a positive economic story, “said Hynes.” Silver, unlike gold, can lag behind the industrial component relatively well over the next 12 months keep.”

Consumption demand from the renewable sector will also increase. “The whole decarbonization story is going to accelerate after COP26, and we’re starting to see these benefits for the silver market,” added Hynes.

The Silver Institute predicts a supply deficit for the silver market in 2022, pointing to stronger industrial demand and global decarbonization efforts.

“This is due to strong industrial demand, which, in addition to the ongoing recovery after Corona, is also benefiting from structural factors. These include the electrification of the vehicle fleet, 5G technology (mobile phone) and the commitment of governments to ‘invest in’ green ‘infrastructure “, commented Commerzbank analyst Carsten Fritsch.” Significantly more silver is used in electric vehicles than in cars with Internal combustion engine. “

According to raw material strategists at BofA, the shift towards more solar energy is another decisive factor that could drive the price of silver up.

“The silver market has rebalanced in terms of production discipline and demand from new applications, including solar panels,” said the BofA strategists. “Increased investments in solar modules should boost silver. Using the IEA’s Net Zero scenario, PV silver demand could reach 8,550 tons by 2030, compared to 2,900 tons in 2020. So we remain constructive. “

Price forecasts

Analysts’ price forecasts for the next year fluctuate between USD 24 an ounce and over USD 30 an ounce, depending on the outlook.

Commerzbank analyst Carsten Fritsch sees silver at USD 26 per troy ounce in 2022. “The silver price should benefit from this positive demand outlook and rise to USD 26 a troy ounce next year. Silver would also catch up a little compared to gold. This is not uncommon. ”As silver usually follows the price movements of gold disproportionately. This year it happened downwards, next year it should happen upwards, “said Fritsch.

ANZ’s Hynes is more bullish on silver than gold, but still sees the precious metal ending the year at just $ 22 an ounce, after peaking at $ 24 in mid-2022.

Hynes said silver should be viewed as an inflation hedge next year, but added that many traders don’t see it that way. “Its industrial use in the electronics sector is relatively closely related to some of the drivers of inflation we are seeing right now. It has a place in an inflation-protected portfolio, but I don’t think investors generally see it that way.” Wise, but it deserves a place in it, “he noted.

Silver is the epitome of the inflationary metal, said Leigh Goehring, Managing Partner of Goehring & Rozencwajg Associates.

“I think everyone should accumulate silver. And I have no doubts that in this bull market there will be another attempt at the silver market,” he said. “It’s hard to believe that the gold-to-silver ratio was 17: 1 on a very brief basis in January 1980. I wouldn’t be surprised if we saw that ratio again at some point in this bull market.”

In the longer term, Goehring does not rule out the possibility that silver will rise to over USD 500 this decade. “Silver is playing a massive catch-up against gold. And if gold goes up to $ 10,000 this decade and the gold to silver ratio drops to 20: 1. That’s $ 500 silver,” he said. “It will be the decade of scarcity and everyone will get poorer except those who have physical gold and silver.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not an invitation to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and / or damage that might arise from the use of this publication.

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