Silver spikes to decade-high, is it sending a signal?

Silver talking points:

• Silver prices have put in a fast run to the 35-handle and that price hasn’t traded in the metal in more than ten years.
• Despite strength in US data the Fed continues to sound very dovish, echoed again by Mary Daly yesterday when she said she saw no reason to stop cutting rates. Gold and Silver have continued to soar with that backdrop.
• I talked about Silver in today’s webinar along with the ‘wealth effect’ and its impact on equities since the GFC.

While it’s been clear in gold for pretty most of 2024, it’s become more visible in other metals such as silver, as well. It was around the Q2 open that a massive rally started in gold and that hasn’t really cooled down. A strong move showed in silver albeit to a lesser degree, but it’s been over the past two weeks when matters have really taken-hold, and at this point silver prices are now trading at a fresh 12-year high.

In and of itself, the metals rally might not be too alarming from a macro perspective; but when looking at what longer-dated Treasury yields have done in the aftermath of the FOMC rate cut, it starts to become clearer that markets are pricing-in a possible policy error from the FOMC.

At the FOMC meeting which announced the start of the cutting cycle, Chair Jerome Powell said that the bank wanted to get in-front of potential labor market weakness. Then a couple weeks later, the NFP report came out strong on all three main data points. That went along with a stronger-than-expected Core PCE report which traditionally is the ‘Fed’s preferred inflation gauge.’ And if we look at the inflation question from the perspective of Core CPI, well that, too, has shown stall and entrenchment for pretty much all of the year.

You have to search for data points that would support a 50 bp cut and one of the few items that does speak to that, headline CPI, came out above-expectation in its most recent release. So, the question persists as to whether such a move was really warranted given the prevailing backdrop.

This is a big reason behind the continued breakout in gold for much of 2024, when the metal came into the year digging into support at 2k and is now making a fast run at 2750. That breakout that started in March and jumped in April went along with a continued dovish push around the FOMC despite stalled inflation data.

When the FOMC cut rates on September 18^th, silver initially pulled back and found support just above the 30-handle. In the month and change since, that rally has continued, and the past few days have been particularly strong as silver has broken out to that fresh 12-year high.

Silver Daily Chart

Risks of Cutting Too Early

When the Fed had stopped hiking but before they started cutting, Jerome Powell had multiple comments regarding the risks of cutting too early. One major one was a re-flare of inflation and, to be sure, in prior historical episodes of inflation, higher prices weren’t truly wrangled until the economy had went into a recession.

In the 70’s and 80’s when the United States was beset by stagflation, Paul Volcker had to ‘break the back of inflation’ by putting the US economy into two different recessions. The first was mild and while inflation slowed, it merely reared back up until Volcker again hiked rates to engineer a second recession.

If you think about it, that makes sense. Any CEO has a fiduciary duty to their shareholders to maximize value so if it’s possible to raise prices, they should, or else they would be a ‘bad CEO.’ It’s only when the economy recesses and companies they prioritize retaining customers and actually competing to gain new customers that moderating prices becomes a good idea.

In the most recent episode, no recessions have shown, and the financial media abound with the dream of a ‘no landing’ scenario. But can the back of inflation truly be broken if companies aren’t forced to re-prioritize?

Well, the move that we’re seeing in longer-dated Treasury yields appears to be pricing-in that expectation for much higher inflation down-the-road. And while surging Treasury yields will normally be a detriment to metals, which carry no yield and present opportunity cost for that same capital, that’s not the case here; so this seems that markets are expecting the Fed and other major Central Banks to continue leaning into rate cuts and dovish policy even with higher inflation expectations, and government bond rates down-the-road. Which can be a recipe for disaster.

At last week’s ECB rate cut, while actually cutting rates, Christine Lagarde said that the bank can’t yet assume that the fight is over, with the interesting twist to the above quote: “We know that we are not at target yet on that front. But are we breaking the neck of it? Yes, I think so. It’s not broken completely yet but we’re getting there.”

Rate cuts may not help get there. And below, I submit the past two years of Eurozone Core CPI data which printed at 2.7% on the same morning the ECB cut rates. The same 2.7% that printed in May of this year.

Eurozone Core CPI

Chart prepared by James Stanley

Silver’s Longer-Term Chart

Dovish central banks are nothing new. That’s pretty much been the name of the game since the Financial Collapse, and there hasn’t really been a recession since save for a two-month period that was quickly offset by Covid stimulus in early 2020. Each episode of economic weakness since has been headed off by an increase in the US debt balance sheet and more and more QE. This has had an incredible impact in gold but by many accounts, silver has been left behind.

After spiking up to just below the 50-handle in the wake of all the stimulus coming online after the GFC, silver has struggled to mount back above the 30-level.

But as gold has taken out and trended above 2k this year, silver has been going to work on 30 and with the backdrop shifting since the Fed cut rates, with longer-dated Treasury yields surging higher and gold going into a strong bullish trend, silver has finally broken out, and made a fast run at the psychological level of 35.00.

At this point, the 34 level appears to be higher-low support potential so if we do see some profit taking from the first test of 35 in 12 years, that’s a logical place to look for support to show up. Below that, both 32.75 and 32.00 provide some additional support structure.

And for follow-through resistance, there’s a Fibonacci level confluent with the 40-handle.

Silver Futures Monthly Price Chart

--- written by James Stanley, Senior Strategist