Will 2023 Be More Than “Just OK” for Silver?

2022 has almost ended. What can we anticipate from 2023? We don't know, but we can make some predictions.

2022 is almost behind us! It has been an intense but overall very good and fruitful year for me. I hope that it’s been fruitful for you too! For silver, 2022 was a “just OK” year. As the chart below shows, silver ends this year slightly higher than it started. On December 20, 2022, the price of silver was recorded at about $23.7, or 2.8% higher than about $23.1 noted on December 31, 2021.

However, it wasn’t a flat, boring year for silver. We can distinguish three major phases. The first one was bullish and it was driven by inflationary worries and the war between Russia and Ukraine. It lasted until March when the price of silver peaked at slightly above $26. Then, the Fed started its tightening cycle, which pushed silver into the bear market, which ended only at the turn of October and November (although silver reached the bottom in late August when it plunged below $18). It was related to the peak in the Fed’s hawkishness and the signals that the U.S. central bank would slow down the pace of interest rate hikes in December. Since then, the price of silver reversed its downward trend and rallied from about $19 to about $24 right now.

Silver Is Not Always a Hedge against Inflation

We’ve learnt a lot this year. We found out that Queen Elizabeth II was not immortal. We also discovered that war on European soil is still possible. And that inflation remains a real threat. Regarding precious metals, the main lesson of 2022 is that they don’t always serve as an inflation hedge.

I mean here dollar-denominated gold prices, as both silver and gold offered protection for non-U.S. investors against depreciation of their domestic currencies. And I mean the short to medium term, as in the long run silver remains an inflation hedge.

You see, the fact is that silver has never been a hedge against inflation. It was simply – just as gold – negatively correlated to real interest rates. And the real interest rates usually go down when inflation rises, unless the central bank raises the nominal interest rates. And this is exactly what happened this year: inflation was rising, but it was accompanied by the Fed’s hawkish response, rising interest rates and a firmer greenback, which hurt the bullion.

Implications for Silver

What does it all mean for the silver outlook for 2023? Well, if silver is not an inflation hedge, disinflation doesn’t have to be negative for it. Actually, if falling inflation rates translate into a more dovish Fed, the silver price could continue the recent rally. Disinflation could also shift some funds from other commodities into precious metals. And when recessionary worries intensify, the bullish trend will be additionally strengthened.

Arkadiusz Sieron, PhD