Silver Salivates Over Rate Cuts
Will pivot stars continue to light silver’s way, or is the white metal headed for a significant reversal?
While we have warned that a fairytale economic ending is unlikely to materialize, investors are all in on the hopes of a soft landing. And with stocks, silver and gold basking in the glory, risk assets are priced as if risk has evaporated. However, with the economic outlook poised to bite over the medium term, the crowds’ unrelenting optimism should be their undoing.
For example, hedge fund manager Bill Ackman was an inflation bull in 2021 and 2022 (like us) and also warned that interest rates were headed materially higher. But, with 2024 shaping up to be a much different story, the ghosts of rate hikes past should make their presence felt over the medium term. He said:
“There has been a huge subsidy in terms of low interest rates, and most companies fixed their rates or debt at very low rates and certainly real-estate investors did the same. And that works until it doesn’t work.
“What’s going to be interesting is to see what happens when people have to reprice their debt. And that can have a certain cliff-like effect. And you’re certainly seeing that in real estate…. I think there’s a risk of a hard landing if the Fed doesn’t start to cut rates pretty soon.”
Thus, while we warned that a serious economic deceleration was underway, prominent investors have adopted our thesis. And while the crowd is programmed to buy the pivot hype, the reality is that when pivots occur, sell-offs across assets like silver are already underway.
Please see below:
To that point, The Conference Board released its Consumer Confidence Index on Nov. 28. And while the expectations index rose, its present situation index hit a new post-recovery low.
Please see below:
To explain, the light blue line above tracks the expectations index (next six months), while the black line above tracks the present situation index (current conditions). If you analyze the latter's performance, you can see that consumer confidence dropped dramatically alongside higher long-term interest rates. Thus, while crude oil has felt the pain, several assets should get hit before the next bull market begins.
While we warned that the resumption of student loan repayments was a mathematical hindrance to consumer spending, a Credit Karma survey found that 32% of Gen Z Americans (aged 18 to 26) said they can’t afford to travel home for the holidays.
Moreover, 25% said student loans make the festivities unaffordable, and 33% said they wish the holidays were canceled due to the bloated costs. As such, the current economic backdrop is nothing like 2021 or 2022.
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Similarly, the Fed’s latest Beige Book (released on Nov. 29) was riddled with ominous results. The report stated:
“Economic activity slowed since the previous report, with four Districts reporting modest growth, two indicating conditions were flat to slightly down, and six noting slight declines in activity.”
In addition, “reductions in headcounts through layoffs or attrition were reported, and some employers felt comfortable letting go low performers.”
Thus, since the ‘bad news is good news’ crowd deems these findings as positive, silver has benefited from the pivot mania, while the USD Index has struggled. However, we expect a reversal of fortunes over the medium term, as economically-driven volatility uplifts the dollar and upends the white metal.
Overall, the fundamentals continue to match our expectations. Higher interest rates have created economic weakness, and the suffering should continue in the months ahead. So, while the S&P 500 celebrates, and the crowd assumes that a weak economy will create strong asset prices, history says otherwise, and a profound shift in sentiment should be on the horizon.
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Precious Metals Strategist