(Kitco News) – As the gold market is expected to consolidate around its recent record highs, investors are finding value in other areas of the precious metals market as it could be silver’s turn to run, according to some analysts.
While gold has seen a surge of bullish momentum this month, the silver market has been relatively calm; however, there are some signs investors are finally paying attention to the market as the gold/silver ratio looks to end the week at its lowest point so far this year. The ratio is currently trading around 85.50 points., down sharply from the 89 points seen at the start of the week.
It now takes 85.50 ounces of silver to equal the value of one ounce of gold. The ratio historically trades between 50 to 60 points. The drop in the ratio comes as silver prices end the week near a three-month high above $25 an ounce.
May silver futures last traded at $25.440 an ounce, up 3.6% from last week. At the same time, April gold futures currently trade at $2,161.10 an ounce, down 1% from last Friday.
The silver market is enjoying the best of both worlds as both gold and copper are dragging prices higher. Copper is ending the week at a 10-month high, with prices over $4 a pound.
Many analysts have said that for the precious metals market to maintain its current bullish momentum, it will need to see some solid follow-through buying in silver next week.
Michele Schneider, director of trading education and research at MarketGauge, said that she is bullish on gold and silver in the near term, but silver remains an attractive inflation hedge because of its industrial demand.
“There is still a question as to what is behind this rotation into silver,” said Schneider. “Is silver getting ready to hedge some kind of a major second-wave inflation? Or is it, with gold up here over $2100 and silver just looking stupidly cheap, and you are getting a run from bottom pickers?”
While both factors could be at play, Schneider said that she expects silver to go higher before it reaches its full potential.
‘We have an almost perfect scenario where people who haven’t jumped into gold, it’s not too late. They can jump into miners and continue to look at silver. Can silver go to $35, $40 an ounce, absolutely.”
While silver has room to move higher, some analysts are warning investors to exercise some caution as the market is approaching overbought territory.
“In silver markets, the bar is razor thin for subsequent CTA buying programs with a cluster of trend signals near the $25.50/oz mark, which risk lifting algo positioning to its effective ‘max long,” said commodity analysts at TD Securities in a note Friday. “Beyond this potential buying program, however, algorithmic buying exhaustion appears imminent. This, in combination with the cautionary signals in our real-time demand indicator, suggest that silver prices are nearing a local high.”
Carsten Fritsch, precious metals analyst at Commerzbank, noted that silver is starting to attract some significant investor interest as silver-backed ETFs have seen considerable growth with inflows of 600 tonnes during Monday’s session alone, the strongest one-day increase since January 2021.
“This reversed all outflows since the beginning of the year at once,” said Fritsch in a note. “ETF investors may see silver as a cheaper alternative to gold. In contrast to gold, silver is still a long way from reaching a record high. For this to happen, the price would have to double from its current level. Although we do not expect this to happen in the foreseeable future, we see significant upside potential for silver. We have raised our year-end forecast to USD 29, which means that silver should also make up ground on gold.”
There is still plenty of room for gold
Although silver has become an attractive value play in the precious metals sector, Schneider said there is still plenty of potential for gold as it holds initial support above $2,150 an ounce, which was the resistance level during December’s blow-off top rally.
Despite the rally, Schnieder said that gold still looks cheap compared to equity markets. She pointed out that the Dow Jones Industrial Average is fairly elevated compared to the lows hit following the 2008 Great Financial Crisis.
“Relative to its growth potential, gold looks cheap. Now, if we switch from gold to silver relative to equities, they are really, really, really, really freaking cheap,” Schneider said.
Although gold and silver has plenty of room to run higher, analysts are warning investors that the precious metals sector could see some volatility next week ahead of the Federal Reserve’s monetary policy meeting.
Next week’s meeting will include updated economic projections and interest rate forecasts, also known as the “dot plot.”
Hotter-than-expected inflation this week has created a little trouble for the Federal Reserve as it has signaled that it wants to lower interest rates this year, but it needs to be confident that inflation is moving back to its 2% target.
Economists at Capital Economics said that they expect the Federal Reserve to signal that a June rate cut is on the table. At the same time, they expect the dot plots to continue to signal three cuts this year.
Schneider said that economic data is starting to weaken, and the Federal Reserve could forced to shift its focus away from inflation and toward supporting the economy. She said that this would be positive for gold and silver.
Schneider said that she expects the Federal Reserve to talk out of both sides of its mouth, signaling rate cuts this year but reiterating that it will remain data-dependent.
In this environment, anything that hints of an impending rate cut will be bullish for the precious metals, she said.
“Until we have further evidence that inflation is getting out of control, the Fed is going to keep things the way they are,” she daid. “They are looking at potentially cutting, whether it’s June or July, it doesn’t really matter.”
Commodity analysts at Commerzbank said that they could see gold hitting a new record next week if the Fed signals at its meeting that interest rate cuts are moving closer.
In other central bank actions, dovish comments from the Bank of England and the Swiss National Bank could support gold prices in the global currency market.
Economic data for next week:
Monday: Bank of Japan monetary policy decision, Reserve Bank of Australia monetary policy decision
Tuesday: U.S. housing starts and building permits
Wednesday: Federal Reserve monetary policy decision
Thursday: Swiss National Bank monetary policy decision, Bank of England monetary policy decision, weekly jobless claims, Philly Fed manufacturing survey, Flash PMI, U.S. existing home sales
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