Can silver outrun gold? Forecast as of 22.12.2023

The future of two precious metals will depend on the US economy. Will it have a soft landing, face a recession, or grow? Gold and silver will react differently. Let’s discuss it and make a trading plan.


Six-month fundamental forecast for silver

Gold has been a better performer than silver in the past few years. The metals have grown 13% and 3%, respectively, since the beginning of 2023. The gold/silver ratio was above 125 during the pandemic and has dropped to 83-84 so far. However, silver is considered a more volatile financial instrument. Most of the production is consumed by industry and other economic sectors and not stored, in contrast to gold. Will the balance of power in the precious metals market change in 2024?

Silver is mined 12 times more than gold but costs 80 times less. Theoretically, this indicates that the white metal is undervalued. True, the demand for silver is much greater than its supply, which suggests a market deficit and creates a solid foundation for the XAGUSD‘s rally. 

Silver supply and demand trends


Source: Bloomberg.

Silver Institute estimates that demand for silver used for the production of solar panels will increase from 5% in 2014 to 14% in 2023. The use of silver in the green technologies sector, including the production of electric cars, will grow from 18% in 2022 to 22% in 2030, according to Bank of America's study.

The XAGUSD‘s lagging performance in 2020-2023, compared with XAUUSD, is due to the pandemic. At the peak of COVID-19, industrial production almost stopped, which made the gold-silver ratio soar to 125. It has since been recovering and returning to pre-pandemic levels, which will change market game rules in 2024, along with the growing demand for the white metal.

I believe silver will outperform gold in two out of three scenarios. Amid a soft landing or economic growth in the US, industry recovery will result in the XAGUSD‘s overperformance against the XAUUSD. The two metals will likely be affected only if a recession occurs. 

Expectations of a federal funds rate cut in 2024 are currently the main factor in the rally of the sector's assets. They will reduce the ETF storage costs and increase capital inflows, just like a decrease in the investment appeal of the US Treasury bonds as the yield declines.

Silver and ETF holdings dynamics

Source: Bank of America.

Six-month trading plan for silver

In my opinion, silver is an interesting alternative to gold. Investors count on the US economy's soft landing, which will benefit both metals. Silver can rise to $29 an ounce. My advice is to buy.

The acceleration of the US GDP will increase the risk of a new inflation peak and push the Fed to resume monetary restrictions. That will strengthen the dollar and drop the XAUUSD and the XAGUSD. However, silver will be falling slower as the industry is recovering. At the same time, we can sell it on growth to $25.55 and $26.4 an ounce.

Finally, the two metals could fall into disgrace if the US dollar reclaims its safe-haven currency status amid a recession, but then they will exploit the Fed's monetary stimuli. Wait for silver to drop to $23 and $22.1, then go long.

Price chart of XAGUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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