Why silver will underperform next to gold over the next two years

Despite the recent price spike of both gold and silver, silver will continue to underperform gold given its greater susceptibility to industrial volatility and reduced household demand, according to a note from Capital Economics. This goes against what a number of other analysts have been arguing.

The price of silver was up over five per cent to $20.48 today, while the gold price was up nearly three per cent to $1,330.10. In its report on 28 June 2013, Capital Economics predicted gold would hit $1,320 by the end of the year, which it did almost immediately, leading the economic analysis group to up its forecasts to $1,360 for 2013, $1,440 for 2014 and $1,530 for 2015.

Chief global economist Julian Jessop notes that gold is recovering for the reasons they predicted, namely, the prospect of ultra-low interest rates over a prolonged period in advanced economies (especially the US) and new demand from households and central banks in key emerging markets.

But silver has remained subdued and the analysts expects it will continue to underperfom. Almost half of demand for silver is industrial, leaving it more susceptible to a weak global recovery. Capital Economics sees a gradual recovery in silver prices to $20.50 in 2013 before a fall to $19 by the end of 2014 and a subsequent rise to $20 by the end of 2015.