Goldman Sachs sees medium-term gains for silver, warns of near-term risks

Oct 12 (Reuters) - Goldman Sachs said on Sunday that silver prices XAG= are likely to rise further in the medium term, driven by private investment flows similar to those boosting gold amid anticipated Federal Reserve rate cuts.

The investment bank also warned, however, of heightened near-term volatility and downside risks for silver compared to gold, which benefits from demand from central banks.

Investment demand for silver is the main price driver for the precious metal, with the bank's analysis showing that for every 1,000 metric tons of new buying, prices typically climb about 1.6%.

However, with the size of the gold market, including massive gold holdings by exchange-traded funds and speculative purchases, at about $450 billion versus silver holdings of about $50 billion, silver should experience more volatility and greater risk of falling prices if investors change their positions, the bank said.

"The silver price can react sharply to such (investor) flows because the market is less liquid and roughly 9 times smaller than gold's, amplifying price moves," Goldman analysts said.

Goldman identified two major risks that could trigger a near-term correction in silver prices.

On the demand side, a temporary pullback in ETF inflows, which have grown more rapidly than usual during Fed cutting cycles, could weigh on silver prices.

On the supply side, the buildup of inventories in the London metals trading hub to more normal levels could be delayed if traders postpone returning silver from the U.S. because of investigations into potential tariffs on critical minerals.

Additionally, silver lacks the structural support enjoyed by gold through central bank demand, the bank said, also downplaying silver's industrial demand as a significant driver of long-term price growth.

While silver is used in solar panel production, Goldman pointed out that solar growth is slowing, and manufacturers are increasingly substituting silver with cheaper materials like copper.

Silver, which crossed the $50 per ounce milestone on Thursday, has gained 74% so far this year.