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Heraeus Precious Appraisal

  • Edition 12 - 12. April 2021

Higher inflation = higher prices for silver?

Rising real-yields and a strengthening US dollar have kept the silver price from moving higher recently. After the sharp Reddit-driven rally at the start of February, the silver price has pulled back in line with the overall sideways trend over the past few months. Central banks have reiterated that they expect to maintain accommodative monetary policy and keep near-term interest rates very low for the next couple of years to support economic growth. However, as the rollout of Covid vaccinations drives hopes of a global economic recovery and bond yields rise in response, is the silver price about to stage a comeback?

Strong industrial demand is expected to keep prices supported. Consumption from industrial end-users is forecast to extend to a four-year high of 510 moz this year (source: The Silver Institute), with strong growth from the electrical & electronics and photovoltaic (PV) sectors. PV installation forecasts have already been upgraded from 159 GW to 181 GW this year, a 27% increase on 2020 (source: IHS Markit) owing to support from governmental policy and falling costs.

Additionally, inflation expectations are rising. The US five-year breakeven inflation rate (calculated by subtracting the real yield from the nominal yield) has moved to its highest level for nearly 10 years at 2.6% and has exceeded the 10-year rate. Last time the five-year breakeven inflation rate was this high was in 2011 and silver was trading around $48/oz, almost double the current price. With precious metals seen as an efficient hedge against inflation, higher inflation expectations should provide upside for silver.

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