Silver Price Between a Rock and a Hard Place / Commodities / Gold & Silver 2023
Caught between conflicting forces,will pivot optimism outweigh the economic malaise that should unfold in themonths ahead?
A Short-Lived Rally?
From war premiums to pivot hopes, silver seessunny skies, as the international and domestic fundamental outlooksincrease investors’ enthusiasm , as the international and domesticfundamental outlooks increase investors’ enthusiasm. However, the excitement ismisguided, as silver often declinesprecipitously when recessions arrive. And with an economic downturn poisedto bite in 2024, the white metal’s recent rally could be short-lived.For example, the University of Michiganreleased its Index of Consumer Sentiment on Nov. 10. Director Joanne Hsu said:
“Consumer sentiment slipped for thefourth straight month, falling 5% in November. While current and expectedpersonal finances both improved modestly this month, the long-run economicoutlook slid 12%, in part due to growing concerns about the negative effects ofhigh interest rates.”
Please see below:
To explain, the blue, green, and blacklines above track the percentage of respondents mentioning high-interest ratesor tight credit conditions as reasons for avoiding purchasing homes, cars orother durable goods. If you analyze the right side of the chart, you can seethat all three lines have risen recently, which highlights the impact of higherlong-term interest rates. Moreover, we cautioned this would occur on Oct. 6. Wewrote:
Asfor the medium-term outlook, we’ve warned on numerous occasions that higherlong-term interest rates (not the FFR) create recessions. And with the recent rate surge dominated by thelong end, the chickens should come home to roost in the months ahead.
So, while gold bounces and silverremains uplifted for now, their price action could look much different in 2024.
Unhappy Holidays
While the ‘bad news is good news’narrative continues to percolate throughout the financial markets, that shouldshift as bad economic data worsens. And with cyclical assets like oil showcasingimmense fear, mining stocks and silver should play catch-up over themedium term.
Please see below:
To explain, the drop on the right side ofthe chart above highlights how U.S. retail sales went negative month-over-month(MoM) for the first time since March. And with weak holiday sales poised tobite as well, the trend should continue as the unemployment rate rises.
Please see below:
To explain, Bain Capital projects that U.S. holiday sales growth will come in at 1%YoY in 2023, which would be the lowest print dating back to 2009.Consequently, the ominous expectation highlights the tepid economic backdrop,and a continued decline should culminate with a 2024 recession, which is bullish forthe USD Index.
As further evidence, Walmart – thelargest U.S. retailer – released its third-quarter earnings on Nov. 16. CEODoug McMillon said:
“Inthe U.S., we may be managing through a period of deflation in the months tocome. And while that would put more unit pressureon us, we welcome it, because it’s better for our customers.”
CFO John David Rainey added:
“Our events have been strong. We’ve beenpleased with those. Halloween was good overall. But in the last couple of weeksof October, there were certainly some trends in the business that made us pauseand kind of rethink the health of the consumer.”
Thus, while we warned repeatedly that arecession, not inflation, has become the primary risk to financial assets, themedium-term outlook should be fraught with peril.
Overall, little has changed to alter ourfundamental outlook. Higher interest rates are having their desired effect, andboom-and-bust cycles have occurred several times throughout history. As such,with over-optimism dominating the U.S. economy in 2021 and 2022, a majorreversal should occur in 2024. And if that happens, mining stocks, silver, andthe S&P500 could suffer substantial declines.
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By Alex Demolitor
Alex Demolitor hails from Canada, and is across-asset strategist who has extensive macroeconomic experience. He hascompleted the Chartered Financial Analyst (CFA) program and specializes inpredicting the fundamental events that will impact assets in the stock,commodity, bond, and FX markets. His analyses are published at GoldPriceForecast.com.
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