Analysts with Bank of America Merrill Lynch on Tuesday raised their 2016 average silver prices forecast 8% to $16.47/oz based on declining mine output and rising industrial demand.
Bank analysts also changed their long-term forecast for 2022 to $19.71/oz from $18.56/oz based on the same improving fundamentals.
"Our analysis shows that fundamentals are now the strongest in years," BofA Merrill analysts said in a report. "In our view, a sustained bear market is only possible if we see investor demand take another leg lower, not our base case."
Silver's fundamentals have been influenced heavily by the mining output curtailments, BofA Merrill Lynch analysts said. Moreover, the potential for industrial demand is rising as global economic activity stabilizes.
"New applications such as solar panels are positive drivers for demand," while "jewellery demand measured in US dollars spent per capita overshot to the upside in recent years but has now corrected," analysts added.
"As such, we see jewellery offtake back on its longer-term trend, so there is scope for continued growth in silver consumption from jewellers."
BofA Merrill Lynch analysts noted their forecast was based on steady investor interest in the form of demand for coins and bars, as well as purchases by silver exchange-traded funds.
But the current global macroeconomic climate, featuring fewer interest rate hikes by the US Federal Reserve, low global interest rates, rising crude oil prices and equity market volatility are supportive of higher precious metals prices, BofA Merrill Lynch analysts said.
In addition, silver mine output looks set to decline going forward, they added. Silver miners were expanding output at a time silver prices were collapsing on the back of subdued investor demand and less offtake from industrial sectors following the financial crisis in 2008.
But the slowdown in supply growth is gradually eliminating the physical supply glut, BofA Merrill Lynch analysts said. "Industry-wide production discipline is driven by a confluence of factors, including capital expenditure cuts. Indeed, this is a key reason we believe many commodities are bottoming out," they added.
