Silver set to shine next year, says Citi

Silver’s 25% fall since March to around US$19 an ounce has rattled confidence in the poor man’s gold, but a series of signals point to a bounce next year with Citi, a leading investment bank, pencilling in a possibly return to US$25/oz.

That price forecast is the peak in the bank’s probability-based assessment of silver, with US$22/oz more likely in the first half of next year.

Whatever the result, Citi’s view of silver is that over the next three-to-six months the metal should “provide an excellent buying opportunity.”

However, the bank’s analysis comes with a warning that tough background conditions, including a strong US dollar, could see silver fall further in the short term, perhaps to a low as US$16/oz before rebounding.

Gold-silver ratio

A second sign that silver could rise next year is the move above 80 by the gold-silver ratio (GSR), an unsophisticated measure, which compares the price of an ounce of silver against an ounce of gold.

Believers in the GSR, which is a number derived by dividing the price of an ounce of gold by the price for an ounce of silver, argue that a high number is a positive sign for silver whereas a low number favour investment in gold.

Not everyone accepts the GSR because of its simplicity, but at current prices of US$1,666/oz for gold and US$19.14/oz for silver the ratio is 87.

At its simplest, the GSR tells an investor that silver looks cheap relative to gold.

India demand

A third signal is strong physical demand for silver in India – traditionally one of the big markets for precious metals and with gift-giving festival season on the way demand from this country could rise further.

For investors, the appeal of silver lies in its close relationship with gold, which is the precious metal trend-setter. But silver also appeals for its roles in a number of fast-growing industrial applications including electronics and the photovoltaics, which underpin rooftop solar panels.

Safe haven buying was the reason for this year’s silver price surge, which took it up to a 12-month peak of US$26.17/oz in early March, shortly after Russia invaded Ukraine, a time when gold also rose sharply to briefly trade above US$2,000/oz.

Back then, in a deeply confused market for most financial assets, the GSR was sitting below 80, a reading which favoured gold compared with today’s GSR of 87 which favours silver.

Not all banks see silver as moving back to the high prices of earlier this year. Goldman Sachs, for example, has silver sticking to a price of around US$19.40/oz for the rest of this year before moving back over US$20/oz in 2024.

ASX explorers that can benefit a rising silver price

It’s the confused buy/sell signals which help explain why Australia’s small band of silver-focused explorers have been struggling for traction.

After reporting encouraging assays from its Mt Carlton gold-silver project last month, Navarre Minerals (ASX: NML) enjoyed a modest recovery to $0.048 earlier this week but is down over the year, with a mid-year capital raising weighing on the price.

Investigator Resources (ASX: IVR) is enjoying considerable exploration success at its Paris silver project on South Australia’s Eyre Peninsula with a boost coming from encouraging rare earth assays at its Apollo prospect adjacent to Paris.

In northern NSW and the Queensland border, Thomson Resources (ASX: TMZ) owns a number of high-grade silver deposits in the New England fold belt and is working on a consolidation strategy to maximise the value of a resource base of close to 100Moz of silver with a plan to build a central processing facility close to Tenterfield.

Silver Mines (ASX: SVL) owns the Bowdens project near Mudgee in western NSW. Rated as the biggest undeveloped silver deposit in Australia, Bowdens contains a resource of 318Moz of silver equivalent (a combination of silver, gold and other metals). The mine approvals process is expected to be completed next year – clearing the way for development to start.

Other ASX-listed stocks with promising silver assets include E2 Metals (ASX: E2M) which owns the El Rosillo project in Argentina and Kingston Resources (ASX: KSN) which owns the Mineral Hill gold and silver mine in NSW and the Misima gold and silver deposit in PNG.

Manuka Resources (ASX: MKR) became Australia’s newest silver play when it started production in March at the Wonawinta mine in western NSW. The initial target is to produce 820,000oz by next month with the potential to grow as it explores a large tenement position in the highly prospective Cobar Basin.

‘Excellent buying opportunity’

Citi, in its analysis, said that there was a 70% probability of silver sliding to a price around US$16/oz-to-US$17/oz by early next year, which is when it sees the metal as “an excellent buying opportunity”.

Downward pressures on the silver price include the strength of the US dollar, a hawkish Fed (the US central bank), high real interest rates and medium term inflation expectations which were “overshadowing declining physical stock levels at exchanges”.

“We expect silver prices to recover to US$22/oz in the first half of 2023 as the Fed changes stance and investor demand for exchange traded funds (ETFs) rises and China improves,” Citi said.

“Our silver supply and demand balance points to a surplus during 2022 as investors shed ETF holdings, duly absorbed by solid physical investment and jewellery demand.”

India, which has a big silver appetite has been restocking ahead of its festival season, importing 208Moz of the metal through to the end of August, which is more than double imports over the same period last year.

“Local silver prices in India are currently at a premium against the global silver price suggesting strong demand at these price levels,” Citi said.

“We expect imports to rise further in the December quarter due to festival and wedding season demand which will put a floor under the price.”