Silver price forecast: has this precious metal been oversold and undervalued?

The silver price forecast for 2020 is a mixed bag. Investment demand is rising, but the precious metal has been underperforming against gold

By the admission of international associations representing the industry, giving an accurate silver prices forecast for the end of 2020 – let alone until 2025 – is “very challenging”. The coronavirus pandemic is forcing mines to shut down temporarily. To make matters worse, demand from some of the main sectors that use this white metal, jewellery among them, are set to suffer from a massive slowdown in production and sales this year.

Here, we’re going to go through all of the latest silver predictions and assess the current state of the market. We’ll also ask whether the 0'>silver price forecast could actually be given a boost because of Covid-19, as investors seek safe havens away from the stock market.

Silver price forecast 2020: the state of the market

Let’s begin with a snapshot of how the industry is doing right now. Even before the global health crisis began, the silver sector was grappling with dwindling levels of production from mines around the world.

As the chart above shows, silver production enjoyed explosive growth from 2011 to 2015 – notching up substantial gains year on year. Since then, heat has been escaping from the market. Output from mines has fallen for four consecutive years from 2016 to 2019, slipping 6.25 per cent from 892.3 million ounces to 836.5 million ounces.

0'>Silver predictions for 2020 seem to confirm this trend will continue, with this year’s World Silver Survey anticipating a dip to 797.8 million ounces this year. This marks a considerable escalation in the production slowdown, and it’s very possible this will be exacerbated by Covid-19. The reduction in mine activity has largely been in response to meagre demand – and in 2019, a surplus of 31.3 million tonnes of silver was actually produced.

Before we zoom out to the forecast of silver prices, and gauge the mood of investors, just take a look at how demand for this precious metal from the jewellery sector – one of the industry’s biggest consumers – has fluctuated in recent years.

After a somewhat tepid performance in 2011 and 2012 – which was arguably to be expected in the immediate aftermath of the global financial crisis – demand enjoyed a healthy resurgence, exceeding 200 million tonnes in 2015, 2018 and 2019. It’s believed that the projected 6.85 per cent drop in demand that’s forecast over the course of 2020 is actually down to changing behaviours among jewellery retailers and their customers. As the World Silver Report notes, there has been “a shift away from heavy plain jewellery to smaller pieces” – with “large-scale retailers shifting assortment space from silver to gold”.

Silver prices forecast: investment demand

You may think that the silver price forecast would be adversely affected by the fact that mining production is slowing and usage in some sectors is on the wane. However, this doesn’t take into account the macroeconomic factors that could suggest silver is on course for a very good year.

As the World Silver Report says: “We expect to see another year of very strong inflows into silver exchange-traded products (ETPs), as well as net buying by institutional investors on both the futures and OTC markets. Driving this behaviour will be renewed interest in silver (and gold) on the back of macroeconomic drivers such as ultra-low interest rates, other stimulus measures and concerns about the outlook for the global economy.”

Will 0'>silver go up in 2020? These analysts seem to think so. Ultra-low interest rates mean that returns offered from cash savings in the bank are disappointing to say the least, while stimulus packages that inject billions of dollars into the global economy can weaken major currencies such as the US dollar.

How high will silver go in 2020?

This is where the silver prices forecast gets a little interesting. At the time of writing, the price per ounce stands at $15.42. This is some way off the 12-month highs of $19.30 that were seen back in September 2019 – down 20 per cent, in fact. Nonetheless, prices have rebounded substantially since 19 March, when they fell as low as $12.

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Setting out the silver price forecast in the near term, the authors of the World Silver Report estimated that the precious metal could retest $19 at some point this year. They then wrote: “Having said this, as a result of its recent weakness, the full year average is still expected to fall a modest 3 per cent year-on-year to $15.70.”

There are reasons to be optimistic, especially if you’re looking at five-year silver price predictions or silver projections for the next 10 years. Data from the report suggests that demand for retail investors for bars and coins rose 12 per cent – 19 to 186 million ounces – the highest level since 2015. Meanwhile, exchange-traded product holdings also reached record highs.

Forecast of silver prices: the battle with gold

There’s another complicating factor when it comes to the silver price forecast: it's standing against 0'>gold. If you’re familiar with cryptocurrencies, you could almost compare this to the battle between 0'>Bitcoin and 0'>Ether. While BTC gets all the plaudits and attention for being the world’s biggest cryptocurrency, ETH is toiling away in the background in second place.

Gold and silver have a similar relationship. Whenever there’s an uptick for gold, a positive impact for the silver price forecast usually follows. But a good metric to keep an eye on is the gold to silver ratio, which measures how many ounces of silver it takes to purchase one ounce of gold.

Silver has been weakening substantially over recent months. As the World Silver report shows, it stood at an average of 86:1 in 2019 – the highest level in more than 25 years. It worsened even more in the start of 2020 as silver’s underperformance endured, with the ratio reaching a record high of 127:1 in the middle of March.

Silver predictions: the outlook

Overall then, the silver price forecast is looking optimistic in the medium term. Although analysts at The Silver Institute think that investors will give this precious metal a wide berth in the coming weeks, they do believe that this precious metal may have been oversold. If Covid-19 infection rates start to slow in the second quarter of 2020, “investor sentiment towards silver is likely to recover”.

Those who follow the precious metals sector are being told to expect “healthy spillovers” into silver if demand for gold rises, not least because the astronomically high gold to silver ratio will help make the white metal look undervalued by comparison. A sustained rally in gold prices is also set to be very good news for investment levels.

FURTHER READING: Which investments are the best during a recession?

FURTHER READING: How to start investing in gold

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