Citi reveals its playbook on silver as the Reddit rally fizzles

Published Tue, Feb 2 20215:12 AM ESTUpdated Tue, Feb 2 20215:21 AM EST

Key Points

On Monday, silver futures rose 8% to $29.06 an ounce — the largest one-day rise in silver on Nymex since at least 2013.
Spot silver has also seen large gains, rising to around $30 an ounce on Monday.
Citi's Tom Fitzpatrick sees potential for the precious metal to challenge historical highs.

Silver soared to an eight-year high this week, fueled by a Reddit trading frenzy that saw retail investors on a popular forum talk up the precious metal. The rally may not be over and silver could test new highs, says Citi analyst Tom Fitzpatrick. On Monday, silver futures rose 8% to $29.06 an ounce — the largest one-day rise in silver on NYMEX since at least 2013 . Spot silver last traded in afternoon trading in Asia at $27.61 per ounce, falling more than 4% after seeing large gains a day earlier. Fitzpatrick, who is global head of CitiFXTechnicals, outlines three potential cases for silver. The most bearish scenario represents gains of more than 100%, if gold prices soar to $2,500 per ounce. If silver can hold above $30 on a weekly close basis, it may "open up the way for extended gains" — and this could help the precious metal push beyond the $35 resistance level, Fitzpatrick said in a note. "Above here and a return to the all-time double highs of $49.45 (1980) and $49.80 (2011) would look likely," said Fitzpatrick . " We have mentioned before that IF we were to test this huge level near $50 a 3 rd time our bias would be '3 rd time a charm' and we would suspect that it could give way." Gold-silver ratio To determine how high silver prices could go, Fitzpatrick suggested that investors observe the gold-silver ratio. The ratio is a measure of how many ounces of silver it takes to buy a single ounce of gold, and investors use it to gauge the relative value of silver to gold. Spot gold has slipped more than 2% since the start of the year while spot silver has risen more than 4%. Based on the existing prices of spot silver and spot gold, the current gold-silver ratio is at about 66.8, according to a calculation by CNBC. The gold-silver ratio "looks like it can go significantly lower with a minimum target of 43.5 and possibly as far as 30.5," he said. Three potential scenarios for silver Looking ahead, the analyst presented three potential cases for silver prices, with most bullish scenario representing a more than 300% gain for the precious metal: Most conservative scenario: If gold goes to $2,500 per ounce and the gold-silver ratio reaches 43.5, silver prices could rise above $57 per ounce. Spot gold was at $1,847.90 per ounce, in the afternoon of Asia trading hours. Middle scenario: If gold goes to $2,500 and the ratio touches 30.5, silver prices would go close to $81 per ounce — that's more than 190% higher than current spot silver prices. Most aggressive scenario: If gold hits $4,000 an ounce and the gold-silver ratio is at 30.5, silver could shoot past $131 per ounce — more than 370% above current spot silver prices. "Time will tell if any of these numbers materialise but right now there seems a very credible argument for Silver over time to not only get back to but likely significantly exceed the all-time high levels posted close to $50 in 1980 and 2011," Fitzpatrick said. Citi's price target for gold Gold — a so-called "safe haven" asset where investors flock to in times of economic or political uncertainty — touched a new high in 2020 as worries over the raging coronavirus pandemic grew. "Our bias has been that this bull market in Gold could take us to $2,500 (possibly even this year) and on a multi-year basis towards $4,000," Fitzpatrick said. — CNBC's Jesse Pound contributed to this report.

Bars of silver bullion sit in the precious metals vault at Grupo Mexico SAB's La Caridad smelter facility in Sonora, Mexico.

Susana Gonzalez | Bloomberg | Getty Images

Silver soared to an eight-year high this week, fueled by a Reddit trading frenzy that saw retail investors on a popular forum talk up the precious metal.

The rally may not be over and silver could test new highs, says Citi analyst Tom Fitzpatrick.

On Monday, silver futures rose 8% to $29.06 an ounce — the largest one-day rise in silver on NYMEX since at least 2013.

Spot silver last traded in afternoon trading in Asia at $27.61 per ounce, falling more than 4% after seeing large gains a day earlier.

Fitzpatrick, who is global head of CitiFXTechnicals, outlines three potential cases for silver. The most bearish scenario represents gains of more than 100%, if gold prices soar to $2,500 per ounce.