Silver is expected to stay “well-bid” in the second half of 2016, according to an HSBC Global Commodities report. Looking at supply and demand economics, one side of the equation is anticipated to remain consistent while the other is expected to rise. The positive HSBC comments come over three months after BAML made similar comments on the silver price breakout being real.

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Silver is moving higher once again in unison with gold

After taking a breather much of July, muting the performance of momentum models that had been long silver and gold, the metal has recently been on a continuation pattern and the trend is once again moving higher.

HSBC Chief Precious Metals Analyst James Steel, in a report out July 28, said silver could be “buoyed by gold, a risk-off sentiment and elevated geopolitical risk.”

Silver, for its part, began a move higher Wednesday while gold moved higher earlier in the week. Steel expects this trend to continue, taking the price in the $16 to $21.50 level. He cites “solid fundamentals” that include stable supply in the face of rising demand from both industrial uses and consumer jewelry.

“Our expectation of gold strength is supportive, as are an accommodative Fed policy, negative interest rates, and geopolitical risks,” he wrote, emphasizing the potential for safe haven investors to keep prices high. That said, the force of trend might not be as strong. “Investment demand, which has been strong this year, may cool but should remain positive.”

The slackening of investor demand could be due to the “robust pace” of accelerating exposure in ETF holdings, near record highs, and strong net long futures positioning on the Comex market. Derivatives positions, unlike physical holdings, are more volatile than ETF holdings, Steel noted, as they tend to reflect more short-term positions.

Noting various market environment stimulus, Steel noted the tendency for silver to be a market where momentum begets momentum. “They are also highly responsive to prices, with long positions generally building on rallies and contracting on downswings,” he wrote.

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Silver and gold are not always correlated and at times have a distinct currency performance driver to consider

Silver and gold often exhibit close price correlation, but understanding their differences is significant. Silver has an industrial purpose as well as for adornment. Gold, for its part, is a shiny metal without much in the way of practical, economic demand.

While Gold is used by central banks as a component of their foreign reserves, it doesn’t have much practical economic role other than as a store of value, which is based in large part on perception.

The price of both silver and gold is driven by the Fed to various extents. “As with gold, the longer a US rate hike is delayed, the better for silver, we believe,” Steel wrote. “With only one rate hike under the Fed’s belt, and a growing realization that 2016 is unlikely to see many, if any, rate hikes, the market’s view of silver – and gold – began to change.”

A key tenant of Steel’s positive analysis that silver remains reasonably well-bid is dependent the silver market adjusting to fewer potential Fed rate hikes. Its not just the number of hikes, but the shape of the model. “A shallower hiking cycle than was considered likely at the beginning of the year,” he wrote. “The scaling back by the market of Fed hike expectations in the wake of the UK vote is also silver and gold-friendly.”

There is also a currency component that comes into play, which is not always friendly, particularly in light of Brexit. HSBC’s currency analysts predict the UK’s vote to leave the EU could lower the GBP-USD currency spread to 1.20 by the end of 2016. This could impact the price of silver, but the price of the euro currency could have more impact. “EUR movements are even more important for gold and silver,” the the HSBC forex team pointing to modeling that projects EUR-USD ending 2016 at 1.10. 

Steel also gives investors a volatility heads up, noting that silver can “outperform gold both to the upside and downside.” In other words, the practical metal is also the most volatile.