Silver will weather industrial demand dip next year, could still outperform gold in the second half of 2025
Sat Dec 28 2024
While it may have started its rally a little later than gold did this year, silver ultimately proved to be the best performer in the entire commodities complex this year. Looking ahead, many analysts and investment banks believe that despite a likely hit to industrial demand, particularly in the early months of the year, the gray metal could outperform gold once again in 2025.
Commodities strategists at TD Securities wrote in their 2025 outlook that the strengthening economies of the United States and China in the second half of 2025 will stimulate demand and tighten the undersupplied silver market, with excess inventories getting absorbed over the coming year.
“The white metal may get squeezed, as recovering Asian demand absorbs recent inventory builds in the aftermath of the Chinese slowdown and the base metal concentrate processing capacity increases,” they wrote. “We project the metal to average $36/oz in the final months of next year, making it a commodity outperformer as the XAU/XAG ratio challenges yearly lows.”
The analysts added that “the #silversqueeze you can buy into was the most exciting trade across the entire commodities complex” in 2024, but they still see massive growth potential for the precious metal during the year to come.
“Make no mistake, silver's rally over the course of the last year has overwhelmingly been tied to gold's, but we note an explosive convexity in the set-up which points to a legitimate case for the erosion and eventual depletion of free-floating inventories on the horizon,” they said.
TD believes that the increased ETF buying activity that comes with a typical Fed cutting cycle “could dramatically shorten the time span to depletion” of existing silver inventories.
“The set-up necessitates higher prices to unlock inventories from unconventional sources,” they concluded. “This is the most convex trade in the complex, and fund positioning appears much cleaner in silver markets than in gold markets. In turn, we expect notable silver outperformance on the horizon.”
TD Securities’s detailed forecasts have spot silver trading at $33.25 per ounce in the first quarter of 2025, $33 in Q2, $34 in Q3, and topping out at $36 per ounce in the fourth quarter. Their outlook for the following year is even more bullish, as they see the gray metal trading between $38 and $39 per ounce in 2026.
Sean Lusk, co-director of commercial hedging at Walsh Trading, told Kitco News that he expects silver prices will continue to benefit from persistent inflation, but he expects some deep pullbacks in 2025, which is where he’d be looking to buy.
“Where's the value here? It's on pullbacks,” he said. “Is it a good discount buy at $25 if it trades back down there? Or even $20 if gold has a setback to $2,500. $2,400, which could easily happen.”
Lusk made the point that historically, run-ups in the silver price have been short-lived and they come with significant downside, but the economic realities have also evolved.
“They’re a double-edged sword,” he said. “These run ups into the 30s and 40s don't last long. But now you've been comfortably settling above some levels here, so that speaks to the inflation that's in the market. And if you don't think that's going away, then we're probably going to remain bid.”
“It's going to be volatile, there's no doubt about that, it always is,” he added. “But the path of least resistance at the end of the day is going to be higher, because Inflation is sticky; it's going to stick around.”
As for industrial demand, Lusk expects that many of the Biden-era green energy subsidies will be going away, and the proposed tariffs could depress demand further.
“If trade wars do emerge, then it's something different. And then you're probably not going to. You're going to be bidding up silver at $30. The path of least resistance [will be] lower, and you're going to look for some setbacks into the low $20s. I can't see it not being that way.”
Analysts at Heraeus Precious Metals said in their 2025 forecast that if market conditions unfold as expected, they believe silver will outgain gold once again in 2025.
The analysts pointed out that the elevated gold:silver ratio suggests that silver is still historically undervalued relative to gold despite this year’s sector-leading rally. “Silver tends to outperform gold in the later stages of bull markets, and a reversion to the 27-year mean ratio of 67 as a result of a rally in silver implies a price of $40/oz,” they said.
Heraeus warned, however, that investors should not discount the risk of recession and its impact on demand. “Earlier this year, the US yield curve uninverted following the longest period of inversion since 1980,” the analysts said. “This indicator has a very strong track record for signalling a US recession in the following 6-12 months. Although a number of areas in the US economy are showing relative strength, including the stock market, according to the yield curve, the US could be in recession by Q2’25.”
“Silver tends to underperform gold in recessions,” they noted. “If industrial activity were to contract as a result, it is possible there could be little growth in industrial silver demand, outside electrics and electronics, and solar photovoltaic demand specifically.”
“As the higher beta metal, silver is expected to outperform gold on a relative basis,” they concluded.
Heraeus forecasts the spot price of silver to trade between $28 and $40 per ounce in 2025.
Darin Newsom, senior market analyst at Barchart.com, said in an interview with Kitco News in December that the $34 level in the spot market right before the election is as good as it gets for a while for silver, and anyone expecting it to ultimately outperform gold in 2025 is likely to be disappointed.
“I think it was spiked, for whatever reason, ahead of the election,” he said. “Silver is hybrid metal. You've got Dr. Copper, which is the economic indicator. You've got gold, which is the precious metal and safe haven market at times of economic uncertainty. And then you've got silver. It's both a precious metal and an industrial metal. And it’s a key component of the entire EV industry and the evolution of global transportation towards electric vehicles.”
Newsom said the U.S. appears to not want to join the rest of the world in moving forward with EV technology. “It wants to go back to the 1950s. That's what it's going to do. That's where it's comfortable, that's what it likes. It's going to be petroleum-based, and so that's going to put a hit on the industrial side of the silver market.”
“I think copper and silver are going to continue to move lower and it's going to be the industrial component of silver that puts it under pressure,” he added. “It's going to be the precious metal side, even though the central banks aren't buying, that keeps the selloff from being a washout, something copper might not have.”
Newsom acknowledged that Europe and even much of the developing world will continue to invest in electrification, EVs and solar energy, but said that it’s dangerous to underestimate the impact of the United States pulling back.
“Remember how big a player the U.S. is on the consumer side of anything,” he said. “If you take the U.S. out of the equation it's going to cause a slippage in silver, but it's not complete. The rest of the world realizes how stupid the United States is and it's going to continue to go forward, so there's going to continue to be demand.”
Newsom also expects to see a divergence between the directions of gold and silver. “Would it be as dramatic as, say, if China joined the United States and both of them said that electric vehicles are just never going to happen, they're not going to move that way? Then I think you'd see a collapse in silver,” he said. “I don't see that happening. But I don’t see anything as far as an uptrend or stronger silver market. I think that's limited by the fact the U.S. just isn't going to play along.”
Newsom said there’s been a fair amount of talk about the gold-silver ratio driving traders back to silver when it rises to historically high levels, and he thinks that strategy could be very risky this time around.
“Say it starts to get out of line,” he said. “Does this bring some unsupported, from a fundamental point of view, unsupported buying interest from investment traders into the silver market versus gold, based on nothing more than ratio?”
Newsom said that relying on the ratio and ignoring markets fundamentals will be dangerous next year. “It could certainly cause a short-term blip in the price relationship between the two,” he said. “But what it would set up, I think, would be more pressure in silver longer-term, once the fundamentals kick back in and those traders start to get back out.”
“I do think that is a possibility,” he concluded. “Maybe not the first quarter of 2025, but as we get a little deeper into the new administration, the reality of the global situation starts to settle in, and we get gold and silver possibly moving a little bit out of line with its historic ratios, that's when I think we could see this little hiccup happen.”
Commodity analysts at BMO Capital Markets are optimistic about silver in 2025, but they believe the gray metal faces more risks compared to gold.
BMO forecasts silver prices to average $29 an ounce next year, up 6% from its previous forecast, and noted that higher gold prices remain the most significant bullish factor for silver in the new year.
One surprising forecast from BMO is that the analysts believe higher cryptocurrency prices could impact silver more than gold next year.
“Given the rise of cryptocurrency and expected support from the incoming U.S. administration, we have naturally had a number of questions as to the potential impact on gold demand. However, gold is driven by macro trends and is viewed as a hedge against risk (while cryptocurrency is still a risk asset),” the analysts said in the report.
Although silver is expected to underperform gold next year, BMO said the precious metal remains well-supported in the long term as the green energy transition and the electrification of the global economy drive industrial demand higher.
Peter Krauth, author of The Great Silver Bull and publisher of SilverStockInvestor, believes concerns about the Trump administration dramatically reducing silver demand may be overstated, not because the new President will be green, but because his political allies will see green.
“Let’s connect a few dots,” Krauth wrote in a recent issue of his newsletter. “Remember, Trump is a real estate guy, and real estate guys like low interest rates. Low interest rates go hand in hand with a weak dollar. And a weak dollar helps boost commodities, like precious metals prices.”
“Some think Trump may try to reverse parts of the Inflation Reduction Act (IRA) Biden signed into law in 2022,” he said. “That guarantees billions of dollars of solar and wind subsidies through to 2035 to decarbonize power. Leading up to the election Trump threatened to rescind unspent funds.”
“But like so many things, it’s not that straightforward,” Krauth noted. “You see, 92% of the IRA’s investments have gone to Republican states, according to Benchmark.”
He pointed out that before the November election, 18 Republican senators wrote an open letter to House Speaker Mike Johnson. “Their message was to save as many tax credits as possible,” Krauth said. “Johnson replied he would use ‘a scalpel and not a sledgehammer.’ Trump even proposed he would prioritize an end to EV mandates for vehicle tax credits and regulations to grow the EV share of vehicle sales.”
“But the fly in the ointment may just be Elon Musk, Trump’s newly appointed lead for the Department of Government Efficiency (DOGE),” he said. “Musk’s goal will be to cut excess regulation, wasteful expenditures, and restructure Federal Agencies to drive structural reform. That’s fine. But Musk needs no introduction as Mr. Tesla. So, cuts to the IRA that hurt Tesla may ultimately be either limited or avoided.”
Another factor Krauth mentioned is that Musk also purchased SolarCity which he rebranded as Tesla Energy, and the company is an important provider of solar panels.
“Again, Musk’s new role heading DOGE and obvious close connection to Trump just might help mitigate risks to Tesla and its solar panel/power storage business,” he said. “If that happens, and whatever form it may take, it could shelter solar panel production and sales in the US to a considerable degree. And one more thing. Musk has tweeted previously that ‘Solar power will be the vast majority of power generation in the future.’ So, he’s pretty much all in on solar.”
“I’m not saying there’s no risk to the solar sector, which could weigh somewhat on silver demand,” he cautioned. “I’m only saying any such risk may be considerably mitigated. For that reason, I’m not overly concerned.”
And according to the Silver Institute’s detailed November report on the state of the market, the gray metal is still set to benefit from a commodity supercycle, short-term pressures notwithstanding.
“If the current bull market continues to evolve into the next metals super cycle as we expect, then investment demand and industrial demand, particularly for metals critical to green energy technologies such as electric vehicles, solar panels, and energy storage systems, will continue to increase for the next several years,” they said. “In addition, this cycle is likely to be amplified by significant supply constraints. Stricter regulatory environments, longer permitting timelines, and outright restrictions on exploration and mine development in various regions are limiting the ability of producers to meet rising demand.”
The Institute emphasized that “silver stands out as a highly strategic asset for institutional investors due to its dual role as an industrial metal and a safe haven during periods of market instability.”
“With its low correlation to traditional assets such as equities and bonds, silver offers powerful diversification benefits,” they said. “Historically, silver has proven its value during times of economic and geopolitical crises, serving as a reliable hedge against inflation, currency devaluation, and systemic financial instability. In the context of the modern global landscape, this role has become even more pronounced.”
They added that the powerful combination of rising demand and constrained supply “is likely to amplify price volatility and lead to significant upward pressure on silver prices during a potential upcoming super cycle.”
“Institutional investors who recognize these transformative trends are poised to capitalize on silver’s unique position in the market,” the Silver Institute concluded. “As global financial systems face increasing challenges, the need for assets that offer both growth potential and protection from systemic risks has never been greater. Silver, with its unparalleled history as both a financial hedge and an industrial powerhouse, offers a compelling opportunity to navigate the shifting tectonic plates of the global economy.”
“Embracing silver as part of a diversified investment strategy not only safeguards against the risks posed by these global shifts but also positions investors to benefit from the metal’s critical role in the next wave of technological innovation and industrial growth.”
Source: https://www.kitco.com/