Various factors are contributing to the losses suffered by silver over the past week. How strong are the bearish fundamentals?
Silver Loses Its 200-Day MA Again
After another beatdown on Sep. 7, silver closed below its 200-day MA. And with the technical damage poised to elicit steeper losses in the months ahead, we think the shorts will emerge victorious until our indicators become more constructive.
For example, we highlighted the economic plight across Europe and how a resurgent VIX could provide further fuel for the U.S. dollar. But, the liquidity backdrop is highly precarious, and the U.S. and Europe continue to siphon cash out of the system.
Please see below:
To explain, the Fed’s balance sheet hit a new cycle low on Sep. 7, as quantitative tightening (QT) remains alive and well. And with the downtrend poised to continue until a recession materializes (in our opinion), silver is stuck between a rock and a hard place, while gold shouldn’t fare much better.
As further evidence, the liquidity fundamentals in Europe are also extremely troublesome.
Please see below:
To explain, the light blue line above tracks Eurozone GDP growth, while the dark blue line above tracks real M1 money supply growth. If you analyze the relationship, you can see that fewer euros in the system is often bad news for economic output. And with money supply growth falling to its lowest level in roughly 25 years, the U.S. dollar should be the main beneficiary from the unfolding liquidity drought.
Labor Concerns
The U.S. labor market’s strength was the main reason we faded the recession narratives in 2021 and 2022. However, with the outlook weakening, job losses should cause even more anxiety in the months ahead. As evidence, The Conference Board released its Employment Trends Index (ETI) on Sep. 5. Selcuk Eren, Senior Economist at The Conference Board, said:
“Some industries are already shedding jobs, including information services and transportation and warehousing. The ETI suggests that weakness in the job market will eventually broaden to the rest of the labor market.
“The number of employees working in temporary help services, an important early indicator for hiring in other industries, has declined steadily since it peaked in March 2022. While still elevated compared to pre-pandemic levels, Job openings – an indicator of opportunities available to workers – are declining rapidly.”
Please see below:
To explain, the blue line above tracks The Conference Board’s ETI, while the red line above tracks total nonfarm payrolls. If you analyze the relationship, you can see that when the ETI suffers sustained declines, nonfarm payrolls are not far behind. Moreover, with the blue line showcasing a noticeable drop on the right side of the chart, the downtrend should continue as higher long-term interest rates further suppress the U.S. economy.
Speaking of which, the ISM released its services PMI on Sep. 1. And while the results were optimistic – with output and employment increasing – they contrasted the findings from S&P Global. And with the latter more accurate in our opinion, we prioritized S&P Global’s data in 2021 and 2022 and will continue to do so now. The report stated:
“Service sector firms meanwhile recorded only a fractional rise in employment midway through the third quarter…. The softer uptick in workforce numbers reflected emerging evidence of spare capacity across the service sector, amid the renewed drop in new business. Backlogs of work fell for a second month running, declining at the steepest rate since November 2022.”
Please see below:
To explain, the blue line above tracks S&P Global’s services PMI, while the gray bars above track services firms’ gross output. As you can see, a lower blue line is often bearish for services output and signals weaker growth in the months ahead. And with manufacturing already in contraction, a services turn could be the final nail in the coffin for the S&P 500 and the PMs.
Overall, the global economic outlook remains precarious, and crude oil’s ascent further suppresses businesses’ profit margins and consumers’ spending power. As such, while higher interest rates and a stronger USD Index were the central parts of our bearish fundamental thesis (the left side of the dollar smile), a recession that culminates with lower interest rates and a surging USD Index should help push the PMs to their long-term lows (the right side of the dollar smile).
The Bottom Line
The fundamentals remain aligned with our expectations, as stubborn inflation helped push long-term interest rates higher and keep the Fed hawkish for longer than expected. Yet, with long-term Treasury yields poised to weigh on economic activity, this cycle should conclude with a recession that pushes the PMs to their final lows and the USD Index to a new high.
In conclusion, the PMs declined on Sep. 7, as more pain confronted risk assets. And with the bearish fundamentals far from fixed, more downside should commence in the weeks ahead.
Alex Demolitor
Precious Metals Strategist