Capital Economics: Why silver won’t outperform gold


Analysts have tipped silver to start outperforming gold over the months ahead, although economists at Capital Economics do not see the grey metal gaining the upper hand anytime soon.

Silver fell to a low of $18.22 per ounce on 28 June 2013 and has since recovered to trade around the $20 mark. Gold, on the other hand, has advanced from its 28 June low of $1,180 to around $1,320.

Strategists at groups such as RBC Capital Markets Global Futures, Deutsche Bank and UBS recently highlighted a number of factors that could support higher silver prices, including increased industrial demand as the US recovery continues to strengthen.

However, Capital Economics chief global economist Julian Jessop and commodities economist Ross Strachan point out that silver is still lagging gold and highlight three reasons why they believe this will continue over the months ahead.

“First, silver prices are more volatile, in part because the market is smaller and less liquid, and partly because silver is often mined as a by- or co-product of other activities, making supply less sensitive to price movement,” the economists says.

They also argue that silver’s greater use in industrial applications than gold leaves the metal vulnerable to continued weakness in the global economic recovery, especially when it comes to China and Europe. Furthermore, another flare up of the eurozone crisis is likely to favour gold more than silver.

Finally, the commentators note that gold is likely to benefit from strong demand from households and central banks in key emerging markets such as China and India.

“Silver simply does not have the same cultural or sentimental appeal as gold, nor is it as well-established as a financial asset,” Jessop and Strachan add.

Capital Economics expects gold to end 2013 at $1,360 an ounce, rising to $1,440 in 2014. Silver, meanwhile, is tipped to reach around $20.50 per ounce by the end of this year, then falling to $19 at the end of 2014.