Why silver’s $40 fair value doesn’t rule out a run to $90

Despite silver prices settling into a perceived comfort zone between $78 and $80 an ounce, Commerzbank AG is cautioning investors about the significant risk of a potentially sharp decline.

In the latest metals note, Thu Lan Nguyen, head of FX and commodity research at Commerzbank, said silver’s fair value is closer to $40 per ounce.

Silver prices on COMEX have hovered around $78-$80 per ounce for the last few sessions, with the exception of Friday last week, when the metal had breached the $83 level for the first time in a month.

Fundamental value and price drivers

On Friday, the silver price had climbed to its highest point since mid-March, a rise that followed the announcement regarding the reopening of the Strait of Hormuz.

However, prices fell back to $78 as tensions in the Middle East escalated and energy prices rose again.

Silver's volatility remains notably higher, though its correction earlier this week mirrored that of gold.

The silver price, for instance, experienced a sharper decline than gold following the outbreak of the Iran war. However, it also saw a more robust recovery in the weeks after the ceasefire.

Silver, like gold, has recently moved independently of its usual fundamental drivers, according to Nguyen.

“Based on a model we have estimated for the 'fair' value of silver, which – as for gold – identifies US real yields and the US dollar exchange rate as key drivers, the silver price should actually be trading closer to USD 40 per troy ounce,” she said.

The significant increase in the price of silver appears to be largely attributable to the upward trajectory of gold.

Silver's rise is primarily because its value was low compared to the price of the yellow metal, according to Nguyen.

An estimate of silver's fair value that explicitly incorporates the gold price more accurately reflects the actual price trend.

“Our interpretation is that over the past year (geo)political factors – which are not (and cannot be) captured by the model – have been the main drivers of the gold price and, with a lag, also of silver,” Nguyen said.

“Since the outbreak of the Iran war, it is now interesting to note that the model value we estimate (excluding gold) has remained relatively stable and has recently signalled a much smaller downward correction than actually occurred.”

Iran war catalyst and bullish outlook

The outbreak of the Iran war served as a catalyst, initiating a necessary correction in the silver market. Prior to the conflict, silver was considered overvalued. 

The war-induced volatility and economic uncertainty helped to adjust the price, bringing it back into alignment with what is considered its underlying, fundamentally justified economic value.

This market adjustment essentially neutralised the previous overvaluation.

“Nevertheless, there is still a significant discrepancy, which is consistent with the continued high valuation of gold,” Nguyen said. 

Despite considering silver potentially overvalued, Commerzbank maintains a bullish outlook on the precious metal. 

The German bank recently upgraded its price forecasts for both gold and silver.

This positive view is based on the expectation that Federal Reserve interest rate cuts in the second half of the year will propel gold prices past $5,000 an ounce, subsequently driving silver prices to $90 an ounce.