Silver Strongest in Decades, Weak Oil Fundamentals Yet High Risk of Spike

Citi is bullish on gold and silver, sees a short-term rise in oil prices but a long-term decline.

Earlier this week, Citi strategist Maximilian J Layton and his team released a report stating that they expect the US labor market to further deteriorate. Gold can hedge against the risk of falling asset prices, and coupled with strong demand from central banks and escalating geopolitical conflicts, gold as a safe-haven asset will continue to rise.

The outlook for silver is the strongest in decades. Historically, when growth sentiment in developed markets (DM) weakens, silver usually experiences its strongest bull market. This situation often implies a weaker dollar, increased allocation of investors to precious metals, and stronger industrial demand for silver. In addition, the solar and electric vehicle (EV) industries currently have a strong demand for silver.

Considering the market's fear of future supply shortages, Citi has raised its price expectations for Brent crude oil in the fourth quarter of 2024 and the first quarter of 2025. However, Citi is bearish on long-term oil prices because the increasing adoption of electric vehicles and new energy vehicles (NEV) reduces oil demand, and the potential for strong growth in oil supply from non-OPEC+ countries.

Citi has raised its gold price forecast for 0-3 months from $2,700 per ounce to $2,800 per ounce, a 1.81% increase from the current price; the gold price forecast for 6-12 months is $3,000 per ounce, a 9.13% increase from the current price; the silver price forecast for 6-12 months has been raised from $38 per ounce to $40 per ounce, a 15.54% increase from the current price; the average oil price forecast for 2025 is $60 per barrel, 20.61% lower than the current Brent crude trading price.

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The safe-haven and hedging role of gold continues to stand out.

Although consumer weakness has been observed in some global markets over the past three months, and long-term interest rates in the US have risen after the Federal Reserve's rate cut in September, gold has still performed well. It is expected that gold prices will rise to $3,000 per ounce in the next 6-9 months.

The US labor market will further weaken, and with the Federal Reserve entering a rate-cutting cycle, gold can hedge against the risk of falling asset prices and is favored by the market as a hedging tool.

In addition, many central banks around the world are still actively buying gold, and the escalation of the situation in the Middle East leading to a short-term rise in oil prices will also benefit gold.Therefore, market participants are willing to purchase gold at extremely high prices, while holders are reluctant to sell their gold.

Strong Silver Demand

The outlook for silver is the strongest it has been in decades. Consequently, Citigroup maintains its target price for silver at $35 per ounce for the 0-3 month period and raises its target price from $38 per ounce to $40 per ounce for the 6-12 month period.

Historically, silver has experienced its strongest bull markets when growth sentiment in developed markets weakens, such as during 2009-2012, 2016-2017, and 2020. In these scenarios, it often implies a weakening dollar, increased allocation by investors to precious metals, and stronger industrial demand for silver.

Currently, industries related to energy transition, such as solar and electric vehicle sectors, also have robust demand for silver. Moreover, the Federal Reserve's interest rate cuts have also encouraged investors to invest in silver through tools like ETFs.

There is currently a significant deficit in silver consumption, which can only be met by silver inventory holders selling their silver. According to Citigroup's model, holders of silver bars and coins need to sell approximately 1% of their total inventory per month to meet the market's excessive demand for silver.

Weak Long-Term Demand for Oil, Growth in Supply from Non-OPEC+ Countries

Recent fluctuations in oil prices have been relatively large, reflecting the tug-of-war between the weak fundamentals of oil and escalating geopolitical risks. Considering the market's fear of future supply shortages, Citigroup has raised its price forecast for Brent crude oil to $120 per barrel for the fourth quarter of 2024 and the first quarter of 2025.However, there is a bearish outlook on long-term oil prices, with an average oil price forecast of $60 per barrel for the year 2025.

A medium to large surplus in the oil market is expected by 2025, partly due to weak demand for oil in some global markets, and the increasing adoption of electric vehicles and new energy vehicles (NEVs), which further reduces the demand for oil.

Moreover, the growth in oil supply from non-OPEC+ countries may be very strong and widespread, particularly in the Americas region.