Why is silver so strong? Deutsche Bank: Even considering gold and copper, we don't understand it!

Entering May, silver has been soaring all the way, with a growth rate even stronger than gold. Spot silver surged nearly 20% to $31.5 per ounce, hitting a new high in eleven years.

This sharp rise in silver seems somewhat "unexplainable." In its latest report on Friday, Deutsche Bank pointed out that the surge in silver in May exceeds the explanation of industrial demand, even when incorporating gold and copper prices into the fair value model for silver, it is difficult to explain the current strength of silver.

Deutsche Bank believes that the current silver pricing is too high, maintaining its forecast for silver price at $28 per ounce by the end of the year. However, further upward momentum is possible, and the gold-silver ratio is expected to rise from the current level of 73 to 80 or higher eventually.

The risk scenario is that the expected deficits in silver in 2024 and 2025 may further reduce silver inventories, with current visible silver inventories equivalent to 12 months of demand, significantly higher than platinum's 6 months.

Silver's Rally Exceeds Industrial Demand Explanation

Deutsche Bank pointed out that the rise in silver prices has already exceeded the range that can be explained by simple industrial demand growth. Although global industrial production is accelerating, it is still not enough to explain all the increase in silver prices.

Specific data shows that the year-on-year growth in industrial production in March 2024 increased from 0.3% in February to 1.6%, while global manufacturing PMI remained almost unchanged, slightly decreasing from 50.6 in March to 50.3 in April, but still higher than the fourth quarter average of 49.0 in 2023.

Deutsche Bank constructed a fair value model for silver based on the US dollar, Comex inventories, global GDP-weighted industrial production growth, and ETF silver activity. It found that with the global industrial sector PMI starting to rise, the prospect of silver appreciation seems reasonable, but the previous range was expected to be 4.5%, similar to the peaks in 2013-14 and 2017-18, but the current increase significantly exceeds the model's prediction.

Considering Gold and Copper, Silver's Rise is also Outrageous

In addition to industrial demand, other factors may also be driving the rise in silver prices. Deutsche Bank stated that one possibility is that the rise in gold prices in April may have pushed up silver, and another possibility is that the rise in copper prices indicates strong industrial demand, thereby driving up silver prices.

Therefore, Deutsche Bank included both gold and copper as explanatory variables in the model, but silver prices still exceeded the fair value of the model.

This approach increased the number of explanatory variables to six, expanding the model reduced the residual error from 51% to 25%, but the error has not been completely eliminated. The main reason for the error is the decrease in ETF silver holdings by 57 million ounces, as well as the increase in Comex silver inventories by 25 million ounces.

In addition, it is important to note that the rise in copper is more influenced by supply factors, such as restricted supply from Chile and Peru, as well as reduced approvals for copper mining projects, rather than demand exceeding expectations. Therefore, copper prices are not a good indicator of rising silver demand.

Current Overpricing of Silver

Deutsche Bank believes that the current silver pricing is actually too high:

"We maintain our forecast of $28 per ounce for silver by the end of 2024. The residual error in the current model is +25%, indicating that silver prices may further rise. We expect the gold-silver ratio to rebound to 80 or higher by the end of the year, currently at 73."

The risk of silver price increase lies in the significant reduction in visible inventory due to supply shortages in 2024 and 2025. Even after these two years of shortages, identifiable silver inventory will still be equivalent to 12 months of demand, significantly higher than platinum's 6 months