There is no question that 2021 gold and silver prices generated strong debates among investors and analysts regarding precious metals’ performance numbers. But with the start of 2022, many investors and analysts are highly optimistic about silver’s potential of outperforming gold.
Silver struggled in 2021, down 13.5% year-to-date. Market factors ranging from mixed economic data, lower industrial demand, and a stabilized dollar affected the price of the precious metal.
Despite the stabilizing dollar, analysts continue to be bullish on both silver and gold. With fears regarding rising inflation rates and slower-than-expected economic growth, the precious metals market might get the boost it deserves.
Demand for silver weakened in 2021, most notably in the industrial use sector. Silver is a hybrid precious metal, used heavily in the industrial sector and amongst investors as a hedge against inflation. With manufacturers cutting down production due to energy shortages, supply chain bottlenecks, and government-mandated shutdowns, demand for silver decreased, leading to excess market supply.
Investors are taking advantage of decreased industrial demand for silver, looking at the precious metal as a bargain compared to gold. The gold-silver ratio is now 80:1 - an attractive ratio for investors.
What key macro drivers to look for in 2022?
The key macro drivers for silver one should pay attention to for the new year will be the industrial outlook and inflation indicators. A weakened US dollar, increased inflation, lower GDP, and inferior bond yield returns were factors that helped silver remain stable in 2021.
With the Fed doing little to control inflation, analysts predict that inflation could break all-time levels in 2022.
Also, another factor to consider is the Fed’s promise of increasing interest rates and end its bond buyback program. Traditionally, gold does well when the central bank increases interest rates. With silver prices trending closely to gold, prices are predicted to go higher for both metals.
Why is the Industrial component of silver so important?
Silver’s stagnant price in 2021 was partly due to the metal’s industrial component. Manufacturers use the metal for jewelry, medicine, solar technology, cars, electronics, and water purification.
Rising energy costs and supply chain bottlenecks reduced manufacturing output, and thus usage of the precious metal.
Demand for gold in the industrial sector depends highly on government restrictions on commerce and manufacturing lockdowns. Silver demand could spike if COVID-19 restrictions are lifted and manufacturing normalizes to pre-pandemic levels.
Government and corporate investment in the renewable energy sector will also add to silver demand to increase as well. With a major shift in the use of solar energy accelerating worldwide, we will see a benefit to owning silver.
According to Bank of America commodity strategists, "Increased investment into solar panels should boost silver. Using the IEA's Net Zero scenario, silver demand from PV could hit 8550 tons by 2030, compared to 2,900 tons in 2020."
What prices do analysts predict for silver for 2022?
Many prominent market analysts project that in 2022 silver’s price will range anywhere from $24 to over $30 an ounce.
Australia and New Zealand Banking Group Limited (ANZ) wrote in a note to clients: “Silver is likely to largely follow gold, but the market balance looks supportive through 2022. The electronics sector, along with strong solar and electronic vehicles, has helped industrial demand to recover to the pre-pandemic level of 556moz this year."
Commerzbank analyst Carsten Fritsch believes silver could reach $26 an ounce in 2022.
"Silver plays massive catch-up rally to gold. And if gold gets to $10,000 in this decade and the gold-silver ratio gets down to 20:1. That's $500 silver. It will be the decade of shortages, and everyone's going to get poorer except for the people that own physical gold and silver." says Leigh Goehring managing partner at Goehring & Rozencwajg Associates.
Analysts at Scotiabank predict silver prices could average $25 per ounce. ABN Amro analysts are a bit more bearish on their stance on the silver future spot price. They are expecting that prices could decline from an average of $23.50 per ounce in 2021 to $22 in 2022.
Finally, one thing we can all agree on is that the precious metals market will have an interesting year. Once the Fed implements new rates, we will see a lot of price swings. Only time will tell if silver will become the dominant metal of 2022.