Plenty of risks continue to throw shade on the white metal.
While a pause in central bank hawkishness was supposed to help silver, we warned that liquidations and lower interest rates are not reasons to celebrate. In contrast, when economic suffering elicits deflation (where we’re likely headed), silver, mining stocks, and the S&P 500 often decline in unison.
To that point, with the Bank of Canada (BoC) pausing on Oct. 25, the recent long-term rate surge has not painted a pretty portrait. The official release stated:
“In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. Consumption has been subdued, with softer demand for housing, durable goods and many services. Weaker demand and higher borrowing costs are weighing on business investment…..
“After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand.”
Remember, Canada sends nearly 80% of its exports to the U.S., so a slowdown in one region is bearish for the other.
Speaking of which, banks are considered a bellwether of economic growth. A prosperous economy leads to business investment and consumer purchases, which are financed by the largest banks. But, with job cuts dominating the headlines, Canadian behemoths are shedding employees, which is bearish for economically sensitive assets like oil.
Please see below:
Likewise, U.S. institutions are also reducing their headcount, and “as credit conditions deteriorate, with housing and commercial real estate under pressure, the banks are expected to take significant loan-loss provisions in the fiscal fourth quarter.”
Please see below:
So, while we were economic bulls throughout 2021 and 2022, despite the recession hysteria, the outlook has completely flipped. Now, we see a recession as highly likely, while the crowd assumes central banks have the situation under control. In other words, we view the current misguided narrative as transitory 2.0.
And if (when) the optimism turns to pessimism, the USD Index should soar, while mining stocks and silver should be the hardest hit.
European Struggles
It’s not only Canada that confronts an ominous economic backdrop. In fact, Europe may be worse off, and the U.S. is unlikely to sidestep a slowdown in both or one of these regions. For example, S&P Global released its HCOB Eurozone Composite PMI on Oct. 24. The report stated:
“The Eurozone economic downturn accelerated at the start of the fourth quarter, with private sector output declining at the steepest rate for over a decade if pandemic affected months are excluded.
“New orders also fell at an accelerating rate, pointing to a worsening demand environment for both goods and services. Companies cut employment as a result, representing the first drop in headcounts since the lockdowns of early 2021, and remained focused on cost-cutting inventory management.”
Please see below:
Thus, while we warned that European economic suffering would stifle the EUR/USD and uplift the USD Index, the fundamentals have performed as expected. Likewise, the euro’s weakness has been a bad development for gold.
Overall, the fundamentals remain aligned with our thesis. The first stage of hawkish central banks and higher interest rates has passed, and now the second stage of a recession that sinks the PMs to their final lows is in progress. As such, mining stocks and the S&P 500’s next major sell-off should occur alongside lower interest rates.
To remain vigilant, subscribe to our premium Gold Trading Alert. We’re on pace for our 12th-straight profitable trade, and the technicals are essential for navigating volatility. Remember, the fundamentals are great for positioning across monthly timeframes, but you must be patient for them to fully manifest. That’s why we use the technicals to determine the best times to enter and exit trades. Furthermore, our members have all of these tools at their disposal.
Alex Demolitor
Precious Metals Strategist