The Mortgage Meltdown Is a Real Problem for Silver
Silver’s 200-day moving average has gone from support to resistance. How low can the white metal go?
With silver sinking deeper below its 200-day moving average, the technical damage comforting the white metal is material. Moreover, with real interest rates and the U.S. dollar also uncooperative, a recession should only intensify silver’s collapse.
For example, the Mortgage Bankers Association (MBA) revealed on Sep. 13 that the housing market remains under pressure from the recent surge in long-term Treasury yields. Joel Kan, MBA’s Vice President and Deputy Chief Economist, said:
“Mortgage applications decreased for the seventh time in eight weeks, reaching the lowest level since 1996. Last week’s decline was driven by a 5 percent drop in refinance applications to the weakest reading since January 2023.
“The 30-year fixed mortgage rate increased to 7.27 percent last week and was 40 basis points higher than where it was in late July. Purchase applications increased over the week despite the increase in rates, pushed higher by a 2 percent gain in conventional loans. Given how high rates are right now, there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy a new home at a higher rate.”
So, while the crowd considers the alarming results inconsequential, a recessionary bear market for gold could be closer than many assume. With the housing market already in trouble from higher rates, a weaker labor market and frailer rents add to the problem.
Please see below:
To explain, Apartment List revealed on Aug. 30 that its rent index (the purple line) has declined by 1.2% YoY. In contrast, the rent Consumer Price Index (CPI) (the light blue line) remains extremely elevated.
However, we warned about the shelter inflation surge in 2021, and if you analyze the middle area of the chart, you can see that the purple line soared well in advance of the light blue line, which means the CPI lags. Similarly, the right side of the chart shows how the purple line sunk well before the light blue line turned. Therefore, with more Shelter inflation downside on the horizon, inflation concerns should turn to growth concerns in the months ahead.
The Real Deal
Investors fail to appreciate the ramifications of slower growth and the Shelter CPI’s weakness. Remember, the Shelter CPI accounts for more than 30% of the headline CPI’s movement. And if (when) the former follows Apartment List’s rent index, inflation should seem less problematic.
Yet, even if the Fed follows through with its 100 basis points of rate cuts in 2024, financial conditions should still tighten and boost short-term real yields.
Please see below:
To explain, the blue line above tracks the inflation-adjusted (real) federal funds rate, and the red line at the right side of the chart highlights how high it could rise if the Shelter CPI declines and the Fed cuts 100 basis points. As you can see, the metric could hit 3.8%, which is near the levels that preceded the 2001 and 2008 recessions.
More importantly, the development would be extremely bullish for the USD Index.
Please see below:
To explain, the black line above tracks the USD Index, while the green dashed line above tracks the spread between the U.S. 2-year real yield and the global 2-year real yield. When the green dashed line rises, it means that U.S. short-term real interest rates are outperforming their global counterparts and the USD Index benefits when the spread increases.
Consequently, if the real FFR rises due to the Shelter CPI deceleration, the 2-year real yield should follow suit and brighten the U.S. dollar’s medium-term outlook. As a result, there are several reasons to be bullish on the USD Index in the months ahead, while the PMs are on the wrong side of these developments.
Finally, while oil prices disagree, JPMorgan CEO Jamie Dimon – who heads the largest bank in the U.S. – warned on Sep. 11 that investors are too focused on the present and blinded to the risks on the horizon. He said:
“To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake. Businesses feel pretty good because they look at their current results. But those things change, and we don’t know what the full effect of all this is going to be 12 or 18 months from now.”
Thus, while the crowd assumes that a recession is extremely unlikely, we view their hopes as Transitory 2.0, and the S&P 500 should face the music before this cycle ends.
Overall, the fundamentals continue to align with our expectations. Hawkish Fed policy and higher interest rates materialized, as we predicted, and the GDXJ ETF (our short position) suffered mightily.
Now, recession clouds are forming, and the crowd has signaled the all-clear at a time when they should be cautious. Therefore, the PMs’ bear market lows should coincide with lower interest rates and a new high for the USD Index.
For more insights on how to prepare for the upcoming turmoil, subscribe to our premium Gold Trading Alert. We’re on a 10-trade winning streak and think even more profits will bloom in the months ahead. As such, it’s never been more important to understand how to navigate the likely volatility.
Precious Metals Strategist