Silver price hits two month high: is this the start of a bull run?

Silver prices are up 7.37% on the week at a two-month high of $24.95 per ounce, boosted by weaker than expected US inflation data. The latest charts indicate that there could be more upside for silver in the short term, at least until the US announces its next rate hike.

“Silver looks ready to break through its decade-long resistance this month, that is likely to coincide with gold prices making new highs,” said Tavi Costa, partner at macro asset management firm Crescat Capital.

“Exciting times ahead for the overall precious metals industry, which has been starved of capital for so long. One thing is true: If this is the onset of a new gold cycle, none of us own enough silver,” he added.

Costa is referring to a decline in gold and silver investment over a number of years which became worse during COVID and will eventually affect mining output, particularly from smaller and medium sized miners. While it is true that the picture for silver is positive for the rest of the year – demand from green transition and chip makers is strong as is the popularity of silver jewellery – there is a caveat for the short-term outlook.

July rate decision

Silver prices tend to drop when investors expect the Fed to raise interest rates, as is the case later this month. This week’s rally was triggered by the US reporting inflation of 0.2% in June amid expectations of a 0.3%, making some investors speculate that the Fed might not opt to raise rates at its next meeting on 26 July. But other US economic data like wages and a strong job market will continue to create inflationary pressures. The US economy is clearly tethering between a slowdown and recession and the Fed will have to do a fine calibration of rates over the coming months.

The pipeline of positives

Several positives are accumulating on the supply side of silver. For the moment, exports from Russia are still getting through to the West and export licences requested before 23 June this year are still being granted. That pipeline will slowly dry up, adding to the overall global lower production expected this year.

In Mexico, the country that produces most of the global silver supply, a new law is imposing strict regulations on the mining industry requiring mining companies to obtain environmental and social permits before commencing operations. This could make it more challenging for companies to operate, particularly smaller junior mining companies.

Medium term

Changing the time-horizon, stricter carbon emissions caps and green energy production targets continue to work in favour of higher silver prices. Solar panel companies are close to making up 14% of the global silver consumption and are driving a 4% increase in demand this year. In contrast, growth in the global silver output has slowed down to 2%.

It remains to be seen if this will be enough to outweigh the slowdown in industrial production in the US and China, the two biggest regions in terms of demand. US June Manufacturing PMI dropped to 46.3, well below the contraction line of 50.

With all of that in mind, there is likely to be some quick changes in the direction in silver prices over the coming months, but the overarching trend looks bullish.

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