The record rise in gold prices this year may have taken headlines in major media, but in reality, the biggest and faster increase is silver. This metal, which has received less attention, has benefited from strong financial attributes and industrial demand. Not only is there a linkage effect brought about by the sharp rise in gold prices due to risk aversion, but the supply gap for this precious metal will continue to expand this year, and supply is in short supply for the fourth year in a row.

This week, after the latest CPI data showed that slowing US inflation spurred expectations of interest rate cuts this year, silver futures hit the highest settlement price since 2013. In Comex trading on Wednesday, the price of silver futures for July delivery rose by $1.03, or 3.6%, to close at $29.73 an ounce, the highest closing price for the most active contract since February 15, 2013. On Thursday, the price of platinum for July delivery rose 0.7% to $1,077 an ounce, continuing the increase at the close of Wednesday. Platinum closed up nearly 3% on Wednesday, the highest price in a year.

On Friday, spot silver traded above $29/oz, with a weekly increase of nearly 5%. The next major test will be the $30 challenge, which briefly surpassed this level in 2021. If the silver price breaks through $30.1003 per ounce, it will rise to the highest level in more than 10 years.

Fawad Razaqzada, a market analyst at City Index and Forex.com, said in a market review that silver is about to break through the key $30 level. Razaqzada pointed out that recent weeks of market data showed that the April non-farm payroll report, the latest ISM survey, and weekly unemployment claim data “did not meet expectations,” which indicates “the recovery of the US economy is slowing down, which will help reduce inflation and reduce the need to maintain a tight monetary policy for a long time.”

He also said, “The reduction in balance sheet liquidity by the Federal Reserve is another factor that is unfavorable to the US dollar.” At the same time, external factors also help suppress the dollar and enhance the appeal of precious metals.

The gold-silver ratio is expected to be repaired, and the price of silver may be seriously undervalued

In addition to gold, investors often buy silver to cope with changes in interest rate expectations. Silver may become a potential “low cost safe haven” for investors seeking stable assets during the period when expectations of the Fed's interest rate cuts heat up. Compared to the price of gold, cheap silver's attractive price point also makes it very popular in the market because more investors can afford it.

Silver is the “poor relative” of gold. This is a dishonorable title, but as far as price is concerned, there is a positive correlation between the two, albeit with a lag. Randy Smallwood, CEO of Wheaton Precious Metals (Wheaton Precious Metals), said: “Silver usually looks like this: it does fluctuate at the same time as gold, but it fluctuates later than gold.”

This relationship can be monitored by the gold-silver ratio, which tracks how many ounces of silver it takes to buy one ounce of gold. Smallwood said, “The price of gold will first soar, and then you will see a rapid rise in silver. Moreover, silver always outperforms gold. It's just late.”

Michael DiRienzo, executive director of the Silver Association, expressed similar views earlier: “Silver's performance may indeed surpass gold, especially when the Federal Reserve starts cutting interest rates.”

The price of silver has soared by nearly a quarter so far in 2024, surpassing gold and becoming one of the top performing major commodities this year. However, relatively speaking, according to the price ratio of gold to silver, silver is still very cheap. Currently, it takes about 80 ounces of silver to buy 1 ounce of gold, and the 20-year average of this ratio is 68.

The movements of these two metals are mostly synchronized because they both have similar macro and currency hedging characteristics. As gold reached a record high driven by rising retail interest, central bank purchases, and bets that the Federal Reserve would cut interest rates, silver also rose. Although investors are not very interested in silver ETFs, physical sales have picked up.

Gregor Gregersen, founder of Singapore-based trader Silver Bullion Pte said: “Even customers interested in buying gold are starting to say, 'OK, maybe I'll buy silver first and then wait for the ratio to rebalance. '” Between April 1 and 25, the site exchanged 74 physical gold per ounce for silver, compared to an average of 44 in 2023.

Earlier this year, the gold to silver ratio reached 90. At the end of April, Tianfeng Securities released a research report stating that the current gold-silver ratio has reached an all-time high of around 90, and the price of silver may be significantly undervalued. Historically, there have only been a few cases where the ratio of gold to silver exceeds 90, usually related to a specific geopolitical situation or economic environment. For example, geopolitical tension between 1991 and 1992 and the wave of interest rate cuts in September last year all affected the gold to silver ratio. From a historical perspective, the average gold to silver ratio is between 40:1-50:1. With the gradual recovery of economic activity and changes in market sentiment, the gold to silver ratio is expected to be adjusted, which indicates potential room for future increases in silver prices.

Well-known investment agency InvestingHaven predicts that the price of silver may reach $34.70 per ounce in 2024, and may reach $48 between mid-2024 and mid-2025. J.P. Morgan predicts that the price of silver may follow the strong trend of gold prices. The average price for the fourth quarter is expected to be around $30 per ounce.

Relatively speaking, the discount price of this white metal compared to gold has narrowed somewhat. In January of this year, the gold-to-silver ratio was over 90, the highest level since September 2022. Citi said in a report that if the Federal Reserve continues to cut interest rates and economic growth remains strong in the second half of the year, this ratio may drop to around 70, but Citi also warned that the economic slowdown may push this ratio in the opposite direction.

Supply and demand are tightening, and the silver supply gap will widen this year

Silver has dual characteristics, both as a financial asset and as an industrial input, including clean energy technology. The Silver Association said this metal is a key component of solar panels, and with the industry's strong growth, silver usage is expected to reach record levels this year. In this context, the market will experience supply shortages for the fourth year in a row, and this year's supply shortage is regarded as the second largest shortage on record.

The World Silver Association said that due to strong industrial consumption, demand for silver increased by 2%, but total silver supply fell 1%, and the global silver supply gap is expected to expand 17% to 215.3 million ounces this year. Metals Focus managing director Philip Newman pointed out that the shortage in the silver market provides strong support and a solid bottom for silver prices. The gap fell 30% last year, but the absolute value of 184.3 million ounces is still astonishing. Global supply has basically stabilized at around 10 ounces, while industrial demand has performed very well, increasing 11%.

Metals Focus managing director Philip Newman pointed out that the shortage in the silver market provides strong support and a solid bottom for silver prices. The gap fell 30% last year, but the absolute value of 184.3 million ounces is still astonishing. Global supply has basically stabilized at around 10 ounces, while industrial demand has performed very well, increasing 11%.

According to Silver Bullion's Gregersen, this has led industrial users, who usually rely on miner supplies, to seek ounces by consuming major global inventories. Inventory tracked by the London Bullion Market Association (LBMA) fell to the second-lowest level in history in April, while volume on the New York and Shanghai Exchanges was close to seasonal lows.

TD Securities said LBMA's inventory could run out in the next two years given the current rate of demand. Daniel Ghali, the agency's commodity strategist, said in an April report that the overall data exaggerates the availability of metals because it includes exchange-traded fund (ETF) holdings.

Gregersen said, “We will slowly see supply tighter as industrial demand will rise. If investors also start buying, then I think over a period of two to three months, the biggest question is probably 'Where do I find the supply? ' rather than 'How do I sell silver? '”