Silver futures: Will price rebound off recent lows and begin a new bull run?
The US silver futures plunged over the past month as the strengthening US dollar (USD) led to an exodus of investment in the precious metal market.
The forward silver contract traded on the New York Mercantile Exchange (NYMEX) fell to $18.179 a troy ounce (oz) on 7 September, down 11.8% compared with a month ago. The October silver futures price was also 24.4% lower than the same time last year.
Following the continuous hawkish stance of the US Federal Reserve (Fed), which plans to maintain its monetary tightening policy to combat soaring inflation in the US, the market is widely expecting another interest rate hike. The Fed aims a return to 2% inflation, which would bring it down from 8.5% in July.
Fed vice chair Lael Brainard said on 7 September:
Earlier on 26 August, Fed Chairman Jerome Powell had warned that rate increases would proceed and higher rates would likely remain.
Ole Hansen, head of commodity strategy at Danish bank Saxo Markets, commenting on the hikes on 5 September, said:
The US dollar index (DXY) hit a 20-year high over the past week amid anticipation of another 0.75 percentage point interest rate increase in late September. The DXY was last at 109.68 on 7 September at GMT 2039, easing slightly from 110.21 in the previous day.
Silver is an industrial metal and a safe-haven asset and attracts investment when interest rates are low, as returns from other assets such as the US dollar are lower. However, with the USD rising, many investors are reducing their silver positions in favour of the dollars or assets which provide better return in the high interest rate environment.
Amid the high interest rate environment, many investment funds changed their silver futures investing strategy to reduce holdings in the metal.
In the week ending 30 August, “precious metals saw continued selling with speculators cutting their gold net long by 32% to 20.7k lots while increasing net short positions in silver, platinum and copper,” Hansen added.
Silver price chart
Are you interested to learn more about silver commodities and how macroeconomics affect the market dynamic?
Before investing in silver futures, read this analysis to learn more about the silver futures market and the precious metal’s supply and demand outlook.
What are silver futures?
Silver futures are derivatives with silver as underlying assets; precious metals are traded on exchanges such as the NYMEX and the Shanghai Futures Exchange.
Silver futures are contracts for silver set for forward delivery at a set price on a set date. Market participants (buyers, sellers, producers) use silver futures to trade and hedge their risks against unfavourable price movements in the market.
The NYMEX futures’ minimum contract unit is 5,000 troy ounces and monthly contracts are listed for three consecutive months. The settlement method for the silver futures is by delivery.
Besides being a safe-haven asset, silver is also a key material in electric vehicles, induction chargers, photovoltaic cells, 5G devices and networks. Hence, silver futures price is supported by the precious metal’s industrial demand.
What is your sentiment on Silver?
Silver futures versus over-the-counter market
In contrast to the futures market, the physical silver benchmark is published by the London Bullion Market Association (LBMA). Physical silver market price is based on over-the-counter (OTC) transactions with contracts settled by physical delivery.
London is the world’s biggest physical precious metals trading hub, and the city’s holding of silver is an indication of the OTC market condition.
According to LBMA’s vault data, the physical holding of silver fell to 28,506 tonnes (valued at $16.4 billion) at the end of August, the lowest volume since the data reporting started in July 2016.
Silver futures historical performance
The NYMEX silver futures price started 2022 at $22.810 a troy ounce and climbed over the first quarter to peak at $26.895 on 8 March, the highest price since June 2021. The contract began falling in subsequent months as interest rates hike pressured the market.
Numerous economies, including the US, have been tightening their monetary policies this year. They have raised interest rates and slowed asset purchases to counter the effect of rising inflation.
On 4 May, the Fed raised interest rate by half a percentage point on 4 May, after its first hike in more than three years on 16 March, when the rate was lifted by 0.25%.
Amid the higher interest rate environment and a stronger US dollar, the silver futures price fell to a two-year low at $17.596/oz on 1 September. Although prices have rebounded above $18/oz and the NYMEX October contract last settled at $18.179/oz on 7 September, it remained around a two-year low.
As a result of the uncertainty caused by the Covid-19 pandemic and its related economic impact, safe-haven assets such as gold and silver’s value were boosted by increased investment inflow. Silver hit an eight-year high at nearly $30/oz in March 2021 but fell shortly after.
Silver supply and demand in 2022
Supply and demand of silver is expected to grow in 2022, according to the World Silver Survey 2022 by The Silver Institute and precious metal consultancy Metal Focus.
Silver supply is forecast to increase to 1.03 billion ounces in 2022, up 3% from the previous year. Industrial demand for silver accounts for more than half of the total global consumption, and demand is expected to rise by 5% year-on-year (YOY) to 1.1 billion ounces and the overall market balance is estimated to be in 71.5 million ounces deficit.
In its silver survey 2022, Metal Focus forecast the deficit could persist beyond this year.
Silver futures price forecast
As a result of the forecast silver deficit in the market in 2022 and beyond, Metal Focus projects the average silver price at $23.90 a troy ounce in 2022.
Trading Economics’ silver price forecast by the end of September is expected at $17.66/oz, and $16.65 for the next 12 months.
According to the World Bank Commodity Market outlook in April, the organisation projects the average silver price at $24.20/oz in 2022, falling to $22.50/oz in 2023 and $21.00/oz in 2024.
Note that analysts’ predictions can be wrong and have been inaccurate in the past. Always do your own research before making any investment decisions. And never invest more money than you can afford to lose.
FAQs
Is silver predicted to go up or down?
Analysts such as Metal Focus have predicted the average silver prices to rise to $23.90 a troy ounce (oz) this year. However, Trading Economics projected prices could fall to $17.66/oz by the end of September and even further in the next 12 months.
Keep in mind that analysts’ forecasts can be wrong and shouldn’t be used as a substitute for doing your own research. And never invest what you cannot afford to lose.
Is silver a good investment?
The dual purpose of silver as a safe-haven asset and industrial metal is a supporting factor. However, whether it is a good investment for you or not depends on your investing goals, portfolio composition and risk profile. You should do your own research and never invest what you cannot afford to lose.
What causes silver prices to rise?
As a safe-haven asset, silver prices tend to move in tandem with gold in response to macroeconomic factors. A rise in interest rates and the value of the US dollar weighs on the silver price, while higher inflation, lower interest rates and a weaker dollar provide support.
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