Sideways Silver Speaks Volumes

Why is silver stuck in neutral if a pivot is on the horizon?

While the economic data pulls risk assets in competing directions, silver’s inability to hold $24 highlights the waning momentum confronting the PMs; and while gold and mining stocks both rallied on Jan. 19, they’re also stuck in consolidations, as the narrative bulls struggle to find new catalysts. 

As a result, since Fed officials continue to rain down hawkish warnings, it’s likely only a matter of time before the momentum investors flee. 

For example, Boston Fed President Susan Collins said on Jan 19 that there is “a long way to go” to balance labor demand with supply. She added:

“While the latest average hourly earnings data suggest some softening of wage pressures, labor costs continue to grow more rapidly than is consistent with 2% inflation.”

Thus, while we’ve warned about wage pressures for months, she also supports a more hawkish FFR path than what’s priced in.

Please see below:

Source: Reuters

Likewise, Fed Governor Lael Brainard said on Jan. 19:

“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis.”

Therefore, while the overwhelming consensus assumes the Fed will pivot in the months ahead, we see things from the opposite perspective. However, it’s this consensus narrative that helps uplift gold, silver and mining stocks in the short term. For example, please see this Bloomberg headline from Jan. 19:

Source: Bloomberg

In contrast, as the epic battle unfolds, we side with the Fed because the fundamentals support higher interest rates.

To that point, Procter & Gamble (P&G) – one of the largest U.S. consumer goods companies – released its second-quarter earnings on Jan. 19; and after the company raised its full-year sales guidance, CFO Andre Schulten said:

“We have seen in late December, very strong consumption in the U.S (…). When we look at the U.S., our biggest and most important markets, we actually see an acceleration of volume share by 50 basis points over the past three months and even 80 basis points over the past one month. Again, all of that gives us confidence to raise the top line guidance.”

He added:

“In terms of peak pricing, you're right, many of the large price increases get left this fiscal year. But that doesn't mean that we're not putting more pricing in the market. We have a number of price increases that go into effect in February. There's two components here. One where lapping price increases were executed last year, but we're also still passing through some of the cost pressures via incremental pricing around the world.”

So, while the crowd sees things from the post-GFC perspective, we believe the Fed’s inflation fight is far from over.

Please see below:

Source: P&G

To explain, the red box above shows that P&G raised its prices by an average of 10%, while the blue box above shows that volume declined by 6%. As a result, the earnings outperformance on Jan. 19 was driven entirely by price increases. 

Please see below:


Again, please remember that P&G has a nearly $340 billion market cap and posted nearly $21 billion in Q2 revenue, so its actions are material; and when the CFO says, “we have a number of price increases that go into effect in February” on top of the 10% recorded in Q2, the crowd doesn’t realize that the Fed’s inflation fight will be one of attrition.

Overall, silver remains uplifted because the crowd has placed ‘big bets’ that the Fed will pivot in the months ahead. Yet, their optimism contrasts inflationary history, and the current economic conditions also signal a much different outcome. Consequently, we expect risk assets to re-price substantially over the medium term.

Do you believe in the pivot narrative, or is the Fed actually right this time? How can inflation hit 2% if P&G is still raising its prices by 10%? And how wise is it for bond traders to follow the post-GFC playbook?

Alex Demolitor
Precious Metals Strategist