What happened to silver in Q1 2018? Our silver price update outlines key market developments and explores what could happen moving forward.
The silver price made gains of 0.21 percent in the first quarter of the year, supported by a weaker US dollar and inflation.
While gains were initially offset by expectations of a US Federal Reserve interest rate hike, silver headed in an upward motion in March after the hike became official.
In addition to the factors mentioned above, analysts also predict that a silver supply deficit this year will prop up prices.
Read on for an overview of the factors that impacted the silver market in Q1, plus a look at what investors should watch out for in the next few months of the year.
Silver price update: Q1 overview
As mentioned, the silver price rose 0.21 percent in Q1. As the chart below from Kitco shows, the white metal experienced several ups and downs, but reached its highest level toward the end of January.
Chart via Kitco.
The precious metal found its highest point on January 24, reaching US$17.54 per ounce. It increased 0.2 percent that day, finding support when the US dollar hit a three-year low after comments that US Treasury Secretary Steven Mnuchin welcomed a weaker currency.
Meanwhile, silver fell to its lowest point of the quarter on March 20, trading at US$16.14. The gray metal hit this low when the US dollar strengthened ahead of the Fed’s interest rate hike. That’s because higher rates tend to curb the appeal of holding non-yielding assets such as silver.
Silver price update: Factors to watch
As the second quarter of the year begins, investors interested in the silver market should be aware of a number of factors that could impact the precious metal’s price.
Much like gold, most analysts agree that political uncertainty, the state of the US dollar and increased interest rates will continue to be key drivers for the silver price in 2018.
In terms of political uncertainty, analysts at FocusEconomics stated, “[t]he recent upturn in prices came as President Trump decided to impose hefty tariffs on imported steel and aluminum, shaking up markets and intensifying fears of a full-blown trade war. This fueled more safe-haven demand for silver.”
Brien Lundin, editor at Gold Newsletter, also addressed the tariffs, stating, “I think they’re terrible. They’re a terrible idea. I think it creates uncertainty, which creates volatility in the market.” Volatility in the market often brings investors to safe havens such as precious metals.
While gold is typically an investor’s first choice in a shaky market, Dr. Kal Kotecha, editor and founder of the Junior Gold Report, said “silver [is] taking on a lot of base metal characteristics as well and being a cheap man’s gold. I believe it’s [going to] propel itself quite a bit higher. So when gold starts moving on a percentage basis, silver will accelerate that, and it is only so long you can submerge something.”
Other political concerns stem from US President Trump’s chaotic administration. On Friday (March 16), departures of two key officials, former Secretary of State Rex Tillerson and top economic advisor Gary Cohn, left investors worried. This political disruption resulted in a weakened greenback, which made bullion cheaper for holders of other currencies.
Increased interest rates also drove silver prices during the first quarter, as the Fed and interest hikes took on a major role toward the end of Q1.
As forecast towards the end of Q3 last year, three interest hikes were proposed for 2018, the first of which took place on March 21. Like gold, silver faced a fall before the Fed implemented the hike, but then experienced gains on the back of the announcement.
According to Bilal Hafeez, strategist at Nomura, the US dollar’s movements prior to a hike “are all about expectations,” and that is what pushes it up while commodities like silver fall. “Indeed, the dollar has followed a pattern of trading relatively well into Fed hikes, but selling off after,” he noted.
Kitco’s Jim Wyckoff said, “selling pressure in gold and silver occurred because traders reckoned a US rate hike would be bearish for the metals. And when the rate hike actually occurred, the metals moved higher because the sellers were already exhausted and had played out their rate-hike hand.”
With two more hikes forecast for 2018 and a steeper outline for hikes in 2019 and 2020, there will be many opportunities for investors to turn their attention to bullion, forcing prices upward.
Shifting away from its comparison to gold, demand for silver from industrial applications continues to grow, lifting the price of the metal up.
“Along with a decline in global mine supply, stronger demand for industrial usage of silver from solar panel makers and the auto sector as it moves towards increased electrification, has placed upward pressure on prices,” said analysts for FocusEconomics.
In a report released on January 18, Michael DiRienzo, executive director of the Silver Institute, said “[s]trong industrial demand, jewelry demand and renewed investor interest will continue to support the market as mine production could decline for the second consecutive year by 2 percent in 2018.”
Silver price update: What’s ahead?
Many industry insiders acknowledge the struggle that silver has experienced in Q1, but still predict a bullish year for the gray metal.
According to panelists at FocusEconomics, “[p]rices are expected to rise this year as supply remains constrained and demand from industrial applications continues to grow. Expectations of higher jewelry demand and higher volatility in financial markets are also seen driving up prices.”
He did not provide an exact estimate, but did say there is a problem with current silver pricing. “Silver is much stronger than it was. But certainly, there’s a bit of weakness in the pricing of silver,” he said.
David Morgan of the Morgan Report is a true believer in silver and its capability to not only increase in price, but outperform gold as well.
“I think this year silver will outperform gold. I could see a 30-percent increase in the price of silver from the bottom, and maybe something similar in gold from last year — 10 to 20 percent. Those are modest numbers relative to what gold can do. But if you compound your money at 20 percent, you could make a fortune over a few years, really,” Morgan said.
Bart Melek of Canadian brokerage TD Securities also forecasts that silver will outperform gold in 2018. “Considering silver’s underperformance, its traditionally higher volatility and historic relative strength during periods when investors are building gold exposure, the white metal is on track to outperform,” Melek stated.
Melek predicts that the average gold price will land at US$1,313 per ounce, while silver will trade at US$18.88 in 2018. That would put the gold/silver ratio just below 70.
FocusEconomics panelists estimate that the average silver price for Q2 2018 will be US$17.10. The most bullish forecasts for the quarter come from ANZ and BMO Capital Markets, both of which are calling for a price of US$18.20; meanwhile, Natixis is the most bearish with a forecast of US$16.
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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.