Silver has been a graveyard for investors since the Hunt brothers tried to corner the market for “poor man’s gold” 40 years ago, so when a big-name investment bank earlier this week forecast a 60% rise in the silver price most investors yawned.
Citi, which has a well-connected resources research team, has put its neck on the silver block in an advisory note with a tip that the price of the metal will rise to $40 an ounce over the next 12-months.
Silver is currently trading around $24.80 an ounce on the London bullion market, having already risen by 38% from $18/oz since the start of the year.
Citi’s case for silver is based on growing demand from investors who see silver as a cheap entry point into the world of precious metals dominated by gold, with a bonus of strong industrial demand.
But the bank doesn’t stop at a 605% silver rally. It also argues that there is a technical case for silver doubling $50/oz, and potentially rising four-fold to $100/oz.
Investors with memories that go back to 1980 will be wary of such optimistic forecasts because of the mess made of the silver market by three Texan oilmen, Nelson Bunker Hunt, Lamar Hunt and William Herbert Hunt who concocted a scheme to “corner” the silver market — which they almost did.
Unfortunately for the Hunt family and its bankers the scheme unraveled spectacularly when commodity exchanges tightened their rules on the use of debt to fund trades, causing the silver price to fall by 50% in four days, triggering panic on other markets.
So, when silver returns as a hot tip there are some market observers who wonder whether there is a risk of history repeating.
Citi is confident that’s not the case, describing the outlook for silver as “a mini re-run of the 2009-to-2011 bull market”, a time when silver rose from $11/oz to $48/oz before retreating.
“Silver is highly-leveraged to a global (economic) recovery, with relatively limited downside,” Citi said, before adding that “it’s not for the faint hearted”.
The bank said it’s forecast of a rise to $40/oz over the next 12-months is based on a combination of sustained strength in investor demand and a recovery in industrial consumption during 2021.
“We expect that investor demand for precious metals exposure will remain high during 2021 as pressure on governments to devalue currencies, concerns about vaccine efficacy and take-up rates and questions over equity and bond valuations and rising global debt remain in most scenarios,” Citi said.
The bank said its foreign exchange (FX) technical team is very bullish on silver with “$50/oz a very realistic target and $100/oz possible.”
If Citi’s bull case for silver doesn’t work out the bear case, including weak global growth, is not particularly punishing with the silver price retreating to around $20/oz.
The bank said silver was more leveraged than gold to a sharp increase in inflation, rebounding manufacturing activity and should benefit more than gold to positive Covid-19 vaccine developments.
“Well over 50% of silver consumption is tied to industrial demand versus around 10% of gold fabrication demand outside jewelry,” Citi said.
“More broadly, around 80% of silver consumption looks to be gross domestic product sensitive.”
Citi also sees the possible election of Joe Biden as U.S. President would be more bullish for silver than gold because of an expected increase in infrastructure spending in areas such as photovoltaics (solar power) and a reduced foreign policy risk premium.