Silver prices have dropped sharply year-to-date and are currently down 13.2% year-on-year at US$15.29 per oz., but the Bank of America (BofA) says its supply and demand model suggests that prices below US$15 per oz. “are hard to justify even now,” and predicts that prices could reach US$20 per oz. in the next 12 months.
By looking at the trajectory for the Euro against the U.S. Dollar and real exchange rates, which are key factors for investment demand, as well as global GDP growth, BofA forecasts silver prices could rally over the next year.
“A rebound of economic growth, supported by fiscal stimulus and central banks, could imply that silver will ultimately take off on two engines, having crashed to earth just now,” the analysts stated in an April 22 research note.
Despite its classification as a precious metal, around 80% of silver consumption is driven by industrial usage. As a consequence, it is more exposed to the health of industry than other precious metals like gold.
With demand for silver from industry positively correlated with global GDP growth, an upturn in industrial activity is required to bolster prices. Therefore, a rebound in the economy, supported by fiscal stimulus packages and central banks, could see silver prices take off, the analysts say.
Also, investor demand for silver has been strong. This demand is being driven by increased sales of silver coins, with purchases of U.S. Silver Eagle coins rising sharply to over 14 million units in March, and sustained growth in silver exchange-traded funds (EFTs), BofA reports.
According to Silver Investing News, so far this year EFT holdings have increased by 65 million oz., a new record high for the sector.
This increased exposure from non-commercial market participants is mirroring the same boost to gold holdings, as concerns over the loosening of monetary policies and apprehension over widening fiscal deficits — and their potential implications for inflation — makes hard assets like silver more attractive.