King Dollar, kneel to your Silver Queen. Credit: UNIVERSAL/COURTESY EVERETT / EVERETT COLLECTION
Fresh data showed China’s economy knocked it out of the park early this year, as its strict pandemic lockdown ended. That doesn’t seem a huge help for stocks, which have opened mixed, but the S&P 500 does seem to be edging closer to February highs.
But investors may not want to get too far ahead of themselves with the bulk of earnings season yet to come, and recession worries lingering. Credit Suisse’s Andrew Garthwaite tells clients “recession risk is flashing bright red,” keeping them wary on stocks, while JPMorgan’s Marko Kolanovic warns even a mild recession could mean equities correct by 15%.
Also grabbing some limelight these days is the King Dollar, whose six-month rally came to a grinding halt in recent weeks. As MarketWatch’s Joseph Adinolfi points out, much of that is due to expectations Fed hikes will soon be over, though speculation of the dollar’s early demise may also be greatly exaggerated.
That brings us to our call of the day from a team of analysts at Citigroup, led by Maximilian J Layton, who see more dollar weakness ahead, which is good news for a shiny asset less often in the spotlight.
“Silver SI00 has already rallied 20% in a short period of time, but we think it has another >10% move in the tank over the coming months to $30/ounce, with our bull case of $34/ounce still a distinct possibility over the next 6 -12 months,” Layton and the team told clients in a note.
The analysts see many fundamental drivers of the precious metal’s bull market yet to fully play out, including more downside for the dollar and interest rates, and increased investor interest in precious metals in the coming months.
Layton and the team note since mid-March, December silver futures SIZ23 are up 13.6% to around $26.02 an ounce, within their $28 target. They are lifting their prior “bullish” 0 to 3 month forecast to $28/oz from $24/oz, their six-month forecast to $30/oz from $28/oz, and a one-year price target to $27/oz from $25/oz.
“Precious metals and especially silver has near perfect conditions for the ongoing bull market,” they say, noting that the fundamental story is comparable to what was seen in the second half of 2007 and early 2008 —weaker developed markets and stronger emerging markets. Those conditions have marked major precious bull markets of the past two decades, they added.
Speculative interest in silver, such as futures action and exchange-traded funds, also has much further to run, says Layton and the team. The value of that interest right now amounts to about $7 billion, while prior silver bull markets have seen it in the ballpark of $12 billion to $26 billion.
“ETF buying seems strongly negatively correlated with U.S. real interest rates and thus a significant move lower in real rates could provide a large move higher during 2023,” said Citi.
And it’s an asset that is prone to dramatic gains once investors wake up, since the market is tiny relative to the scale of speculative interest. Examples of that dramatic price action: a three-week rally in July 2020 that saw prices climb to $29/oz from $19/oz or a 166% surge between August 2010 and April 2011 when prices shot to $48/oz from $18/oz.
