Silver starts the year with extraordinary momentum: After a gain of almost 50% in January and a record of US$117.71 per ounce, Citigroup expects a continuation – BUT at the same time warns the market about the pace and volatility.
The silver market is experiencing a start to the year that is surprising even experienced commodity traders. In light of this, Citigroup expects the spot price for silver to rise to US$150 per ounce within the next three months. This would continue a rally that has driven the raw material up by almost 50% in January alone.
According to Citi analysts, the recent price surge is primarily an expression of continuing buying momentum – especially from China. From the bank’s perspective, higher prices are even a necessary component of the current market mechanism: Only a further increase could induce existing owners to sell inventories and thus bring additional supply into the market. In a recent note, the analysts describe silver as a kind of “gold squared” – i.e. as a metal that amplifies movements in the gold market.
On Monday, silver reached a new record level of US$117.71 per ounce. In the course of the day, the price temporarily jumped by up to 14% – the strongest intraday increase since the global financial crisis in 2008. According to Citi, the trend is supported by strong physical demand and speculative interest – in a market that is considered relatively illiquid compared to other raw materials and can therefore react sensitively to large orders.
Silver in the wake of demand: China and scarce tradable market
For Citigroup, the current upward trend in silver does not only stand for a short-term sentiment, but for a phase in which buyers are willing to accept ever higher prices. The analysts explicitly refer to “strong buying momentum” in China. At the same time, they emphasize that a further price increase may be necessary to stimulate additional sales from inventory. In other words, as long as the market only reacts to a limited extent with a willingness to sell, price formation can only “evade” upwards.
This dynamic also becomes tangible in the Citi analysis via the comparison to gold. Silver behaves like “gold squared” or “gold on steroids”, it says. What is meant is that movements in gold become disproportionately visible in silver because the market is thinner and can therefore fluctuate more strongly. Citi expects that this pattern could continue until silver appears “expensive” in historical comparison – especially relative to gold.
An important reference measure here is the ratio of gold to silver price. Citi refers to a historical extreme from 2011: Should the gold/silver ratio return to 32:1, this would – based on the relations mentioned – suggest silver prices of up to US$170 per ounce. The Citi forecast of US$150 within three months thus remains below this, but fits into a scenario in which relative valuation benchmarks could shift the price framework upwards.
Headwinds remain: ETF outflows, futures sales and inventories
From Citi’s perspective, it is remarkable that silver prices have risen despite factors that are usually classified as a burden. The bank mentions outflows from silver-backed ETFs, sales by speculators on the futures markets and falling inventories in US warehouses. The latter can have a double meaning: Citi speaks of declining US inventories supporting availability elsewhere – suggesting that metal flows and regional warehousing are playing a greater role in short-term market tensions in the current environment.
In summary, the result is a picture in which silver not only benefits from new purchases, but also from a market structure that can accelerate price movements. Especially when a market is described as relatively illiquid, shifts in inventories, inflows and speculative interest can amplify the fluctuations – both upwards and downwards. This is an aspect that also shapes the discussion about the durability of the rally.
Warning signals from trading: Rally pace and volatility move into focus
As impressive as the run is, the warnings that the pace itself can become a risk are becoming just as clear. Citi admits that the extraordinary speed and volatility of the silver increase since December is setting alarm bells ringing for market participants. Heraeus Precious Metals, for example, is quoted. Heraeus points out that history is more likely to suggest that the rally is “closer to its end than to its beginning”. In addition, the gold/silver ratio has been lower than today several times in the past, but such large shifts in such a short time are rare.
This means that there are two interpretations side by side: Citigroup sees further potential in the short term as long as demand impulses – especially from China – dominate and the market needs additional prices to mobilize supply. At the same time, some market observers point out that the speed of the silver rally in particular can be a signal that the movement is accelerating into a late, vulnerable phase.
