Silver’s Slide Was Far From a Surprise

After support became resistance, are lower prices ahead, or is this just a cooling-off period?

While the crowd crowned silver the new king of the financial markets, we warned on Apr. 28 that a turning point was near. We wrote:

To explain, the red line above tracks the daily copper futures price, while the gray line above tracks the daily silver futures price. If you analyze the relationship, you can see that the pair have largely moved in lockstep since late 2021. And with copper trading near its March lows, silver’s outperformance is likely living on borrowed time.  

To further emphasize the point, please see the pair’s relationship on the monthly chart:

To explain, the box in the middle shows how when silver decoupled from copper in 2015-2016, the white metal rallied from ~$16.70 to ~$20.35. Yet, five months later, it declined to ~$16 and gave it all back. As such, if you analyze the vertical gray line on the right side of the chart, you can see that the white metal’s strength contrasts copper’s weakness. And with a meaningful rally already in place, silver’s current price looks more like the 2016 peak than the beginning of a new bull market. 

Furthermore, the prediction proved prescient as silver has corrected and followed copper lower.

Please see below:

Silver’s Slide Was Far From a Surprise - Image 3

To explain, the right side of the chart shows how selling pressure has confronted silver recently. And with the copper price signaling more pain ahead, the white metal’s bear market should continue over the medium term. 

To that point, we warned on May 5 that the crowds’ celebration was increasingly premature. We wrote:

The crowd remains immensely confident, which is a positive sign, not a negative one. When the permabulls count their chickens before they hatch, we’re often near an inflection point. Consequently, we believe more pain will confront the PMs, as the risk-reward is heavily skewed to the downside. 

Fed Up

With Fed officials amplifying their hawkish rhetoric recently, the frightening realities of curbing inflation should haunt silver in the months ahead. For example, while we warned that inflation would remain problematic, Fed Governor Philip Jefferson highlighted how progress has been feeble. He said on May 12:

Silver’s Slide Was Far From a Surprise - Image 4

Likewise, Minneapolis Fed President Neel Kashkari said on May 15:

“We should not be fooled by a few months of positive data. We still are well in excess of our 2% inflation target, and we need to finish the job.”

Richmond Fed President Thomas Barkin said on May 16:

“I want to learn more about what's happening with all these lagged effects, but I also want to reduce inflation. And if more increases are what's necessary to do that, I'm comfortable doing that.”

Cleveland Fed President Loretta Mester said on May 16:

“I need to see more evidence that inflation is still moving down. I think that we just have to stick with what we're doing…. Have we gotten to that [right policy] rate yet? At this point, given the data we've gotten so far, I would say no.”

Thus, with Fed officials acknowledging the challenges that lie ahead, it was investors’ unrealistic expectations, not fundamental reality that spurred the PMs’ recent optimism. Furthermore, with silver’s seasonality still profoundly bearish, the white metal is weak on many fronts. And with a bottom often realized near the end of June, the risk-reward remains skewed to the downside. 

Overall, silver was a short-squeeze beneficiary, as prospective bank failures increased the white metal’s appeal. And even though it’s not really a safe-haven asset like gold or the U.S. dollar, it played that role for a short period. But, that shine has worn off, and with inflation poised to look worse after June, the unsolved issues that upended the white metal in 2021 and 2022 should become more obvious. 

Do you think silver will follow its seasonal path?

Alex Demolitor

Precious Metals Strategist