Price of Silver in 2017: Why It Could Bounce Higher

By Dan Caplinger Markets Fool.com

The silver market performed reasonably well in 2016, with the price of the precious metal picking up more than $2 to close the year at $15.88 per ounce. That in turn helped boost the prospects for silver-tracking investments like the iShares Silver Trust (NYSEMKT: SLV). But as much as investors appreciated the gains, they were a far cry from the highs above $20 per ounce that silver posted earlier in the year. Looking forward to the coming year, investors want to see the price of silver in 2017 climb back toward the $20 mark, but those who follow the silver market aren't sure just how much progress the metal can make. Below, we'll look at what could move the price of silver in 2017.

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Image source: Getty Images.

What will move silver prices in 2017?

The main difficulty that many people have in assessing the silver market is that it acts like a hybrid, showing characteristics of both precious and industrial metals. On one hand, even at prices that are less than 2% of the price of gold, silver is still roughly 100 times as costly as copper, putting silver in a gray area in the middle of the price spectrum. Historically, traders have seen silver as a precious metal, and many mines produce both gold and silver, further associating them in the minds of investors.

Yet in large part, silver is much more subject to supply and demand considerations than gold. Silver gets used in a wide variety of industrial applications, and that subjects it to the normal demand fluctuations of the global economic business cycle. In addition, mined supply of new silver plays a role in setting its price, along with the willingness of those who have stockpiled silver for investment or personal use to bring it back into the market when prices rise.

Even with those countervailing factors, silver traded largely in line with its precious metal counterparts during 2016. After a big gain linked to an early year stock market decline in 2016 and prospects for a potential collapse in the energy markets, silver climbed to its highest levels by mid-year. However, the final boost from the U.K. Brexit vote to leave the European Union didn't lead to the economic chaos that some had predicted. By the second half of the year, excitement about silver waned, and fears of higher interest rates sent silver prices down more than $4 per ounce from their highest levels of the year.

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2017 price projections on silver (per ounce)

Citi Research

$15.50

HSBC

$18.75

ABN Amro

$15.40

UBS

$18.60

BMO

$17

Data source: Analyst projections via Kitco.

As you can see above, there are two distinct camps among those following the silver market. Some believe that better conditions in the market will lead to substantial gains, while others see the current malaise lasting throughout 2017.

The bullish argument for silver

Most of those who are bullish about silver prices in 2017 point to silver's capacity to decouple from the precious metals markets. In particular, excitement about silver's industrial demand could be the driver for higher prices in the minds of some.

Helping to support that view are the latest calls from President-elect Donald Trump for greater spending on infrastructure and construction. If the U.S. moves forward with initiatives that are successful in driving greater activity on those fronts, then the use of silver could increase. At the same time, many expect that silver mining activity will fall in 2017 from year-ago levels, continuing a longer-term trend. Even with prices having bounced from their lowest levels, they're still not high enough to make miners feel particularly enthusiastic about boosting production.

The bearish argument for silver

However, those who are negative on the prospects for silver prices in 2017 point out that the factors that traditionally hurt precious metals markets are poised to become stronger during the year. Late-year dollar strength in 2016 has typically pushed gold and silver prices lower. Moreover, with many expecting multiple interest rate increases from the Federal Reserve in 2017, the costs of holding positions in silver bullion are likely to rise from their rock-bottom levels of the past several years.

Also, the supply and demand factors that theoretically drive silver prices haven't always matched up in the short run. Supply deficits in production of mined silver have been regular occurrences for most of the past 15 years, but that hasn't prevented the silver market from having wild volatility swings over that time period.

What to expect from silver in 2017

Just about the only certainty with silver prices in 2017 is that they're likely to feature substantial moves in both directions, as investors try to figure out changes in geopolitical and macroeconomic factors affecting the market. That might stop the forward momentum that silver generated in 2016, but it could also create opportunities for those who have higher hopes for silver's prospects in the long run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.