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(Kitco News) – Although off its highs and back below $21 an ounce, silver is having its best week since July as it benefits from a short-term rally; However, a research firm said that despite the short-term rally, investment demand will continue to weigh on the precious metal for the rest of the year.
In their latest report, Metals Focus analysts said they expect silver prices to end the year lower as strong physical demand will not be enough to counter weak investor interest in due to rising bond yields and a US dollar near 20-year highs.
The UK precious metals research firm noted that silver’s nearly 12% short-term rally at the start of the week was triggered by changing interest rate expectations, at the series of disappointing economic data highlighting the loss of dynamism of the American labor market.
“Despite the recent pullback in rate expectations and the boost this has given precious metals, institutional investors remain cautious about the outlook for the complex,” the analysts wrote in their report. “Despite the strength of underlying silver demand, this caution remains the biggest headwind for the price of silver.”
The weak investment demand for silver comes despite strong global physical demand. The analyst noted that India’s physical silver market has been exceptionally healthy this year, with imports of the precious metal totaling 6,239 tons.
“This is already the third highest total on record and, while recent price increases may temper near-term imports, the upcoming holiday and wedding season and its associated jewelry and silverware purchases mean that it seems only a matter of time before India posts a new record, eclipsing the 2015 record of 7,530t,” the analysts said.
Metals Focus added that an insatiable appetite for the physical metal has impacted global stocks. Citing data from the London Bullion Market Association, analysts said cash in London’s vaults had fallen to its lowest level since 2016.
Meanwhile, analysts said silver stored in Comex warehouses currently stands at 313 million ounces, the lowest level since June 2020. In the current environment, Metals Focus reiterated its call for the silver market to experience another substantial supply shortfall for 2022. .
“Despite this, the price of silver has struggled in recent months,” analysts said.
Rising interest rates and the strength of the US dollar are the two main factors keeping investors away from silver. Metals Focus noted that real interest rates, after starting the year at -1%, rose to 1.7% in September.
“Unsurprisingly, this also underpinned dramatic gains for the dollar, which this year alone had risen, on a trade-weighted basis, by 19% through the end of September. last, it still remains close to levels last seen in 2002,” the analysts said.
Although bond yields fell from last month’s highs, Metals Focus said they should remain elevated as the Federal Reserve is expected to continue raising interest rates.
“Although rate expectations have been reduced, further tightening is still expected, both this year and in 2023, pushing yields higher and providing further support for the dollar. As a result, we believe prices silver will face renewed selling pressure towards the year-end, which is expected to continue through 2023, despite an increasingly favorable supply/demand backdrop,” the analysts said.
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