Silver’s fair value is closer to $40, but remains supported by higher gold prices - Commerzbank
Silver prices appear to be finding a comfortable range between $78 and $80 an ounce; however, one bank sees the potential risk of significantly lower prices.
In her latest precious metals note, Thu Lan Nguyen, Head of FX and Commodity Research at Commerzbank, said that silver’s fair value appears to be closer to $40 an ounce than current prices.
She explained that silver is being driven more by momentum in gold than by economic fundamentals such as bond yields and the U.S. dollar.
“It seems likely that the silver price has been driven very strongly by the gold price and has risen mainly because it was undervalued relative to the yellow metal. Indeed, an estimate of silver’s fair value that explicitly includes the gold price is more in line with the actual price trend,” she said.
Although Commerzbank sees silver as overvalued on its own merits, Nguyen said she does not expect the current trend to end anytime soon. She added that gold remains well supported as a safe-haven asset and a hedge against elevated geopolitical uncertainty.
Commerzbank has noted that gold’s safe-haven appeal is driven by robust central bank demand, as it is seen as a neutral, apolitical monetary asset.
Although gold has struggled in recent weeks, as it has been a source of liquidity for central banks and investors, Nguyen said it hasn’t lost its safe-haven appeal; at the same time, this environment will also continue to benefit silver.
“Since the outbreak of the Iran war, it is now interesting to note that the model value we estimate (excluding gold) has remained relatively stable and has recently signalled a much smaller downward correction than actually occurred,” she said. “Thus, with the outbreak of the Iran war, part of the ‘overvaluation’ was corrected, and the silver price has moved closer to its fundamentally justified levels again. Nevertheless, there is still a significant discrepancy, which is consistent with the continued high valuation of gold. As long as this persists, the silver price is also likely to benefit.”
Although Commerzbank sees silver as potentially overvalued, it remains bullish on the precious metal. Last month, the German bank upgraded its gold and silver price forecasts.
Commerzbank expects the Federal Reserve to cut interest rates in the second half of the year, which will drive gold prices back above $5,000 an ounce. Higher gold prices are forecast to push silver prices to $90 an ounce.
