China stimulus, mighty gold puts silver on a streak, but not without risk

Spot silver – both an investment asset due to its relationship with gold and an industrial metal – rose to $32.71 per ounce on Thursday, its highest since December 2012, and has gained more than 35% so far in 2024, leading the precious metals complex.

China’s central bank unveiled its biggest stimulus this week since the Covid-19 pandemic and is expected cut its seven-day reverse repo rate. The US Federal Reserve lowered interest rates with a half-percentage-point reduction last week.

“China stimulus is giving industrial metals a boost, something silver traders had been waiting for,” Ole Hansen, head of commodity strategy at Saxo Bank, said.

“Continued gold strength combined with stable to higher industrial metal prices should see silver continue to outperform gold, with the gold/silver ratio falling back towards the 70 to 75 area, potentially driving a 10% outperformance in silver,” Hansen added.

The gold-silver ratio, denoting how many ounces of silver one ounce of gold can buy, is used by the market to gauge future trends as it indicates silver’s current performance against its historical correlation with gold.

“Interest rate cuts should provide a bullish impulse for global activity and support silver consumption. We see prices rising to $35 over the next 3 months and $38 over the next 6-12 months,” Citi analyst Max Layton said.

Macquarie, which expects that silver market deficits will persist throughout its 5-year forecast window, said investor flows are likely to remain key for near-term price action, with ETF holdings arguably offering the greatest scope for support.

However, consolidation in China’s solar industry and slower growth in the world’s second biggest economy could pose headwinds for silver in the near-term.

“China’s newest support measures on their own will probably be insufficient to drive a turnaround in growth and traders do appear to be overestimating the likelihood of another 50 bps cut by the Fed in November,” said Hamad Hussain, assistant climate & commodities economist at Capital Economics.

“Accordingly, the rally in silver prices is unlikely to be sustained over the next few months as some of the tailwinds boosting silver demand fade.”

In top consumer China, industrial output growth slowed to a five-month low in August, underlining weakening domestic demand.

“We believe that silver is primarily dependent on gold in terms of its medium to longer-term performance rather than any silver-market specifics,” said Carsten Menke, an analyst at Julius Baer