Silver Bulls Are the Walking Wounded / Commodities / Gold & Silver 2023
Silver has been a major underperformerin recent months, as the white metal proved no match for higher real yields anda stronger USD Index.
With silver gunning for its 2023 lows,the recent sell-off has done severe technical damage. And while the weaknesshas been a boon for our GDXJ ETF short position, silver could enjoy ameaningful bounce in the weeks ahead. Yet, the technicals are much better thanthe fundamentals at uncovering support and resistance, and our premiumGold Trading Alert has all of those details.
As for the medium-term outlook, we remainbearish and will cover the fundamental metrics that keep us cautious. To begin,we’ve warned on numerous occasions that higher long-term interest rates (notthe FFR) create recessions. And withthe recent rate surge dominated by the long end, the chickens should come hometo roost in the months ahead.
S&P Global and J.P. Morgan releasedtheir Global Composite PMI on Oct. 4. And with output already sputtering, thedata should only worsen as higher long-term rates filter through the system.The report stated:
“Global economic growth remainedlackluster at the end of the third quarter, as output edged higher and intakesof new work contracted for the first time in eight months. There were alsosigns of further weakness in the coming months, as backlogs of work fellsharply and business optimism dipped to a nine-month low.”
Please see below:
Similarly, while gold couldrealize a short-term bounce if rates decline due to economicweakness, the medium-term consequences are still bearish. S&P Global’s U.S.Services PMI report stated:
“September data indicated a continueddecline in new business at service sector firms. The rate of contractionquickened to the sharpest since December 2022, albeit still modest overall.Lower new orders were reportedly linked to weak domestic and foreign clientdemand, with new export orders falling for the first time in five months. Thedecrease in new export sales was the steepest since February and was in starkcontrast to the solid expansion seen in July.”
So, while the ISM’s report was much moreoptimistic, we prioritized S&P Global’s data in 2021 and 2022 and willcontinue to do so now.
Please see below:
Weak Data
The Mortgage Bankers Association (MBA)reported on Oct. 4 that its Market Composite Index declined by 6%week-over-week (WoW) as higher long-term rates make homes even moreunaffordable. Moreover, the longer the gambit persists, the more it stressesthe U.S. economy, and the more the USD Index should soar whenan ominous event occurs. Joel Kan, MBA’s Vice President and Deputy ChiefEconomist, said:
“Mortgage rates continued to move higherlast week as markets digested the recent upswing in Treasury yields. Rates forall mortgage products increased, with the 30-year fixed mortgage rateincreasing for the fourth consecutive week to 7.53 percent – the highest ratesince 2000.
“As a result, mortgage applications grounded to a halt, dropping to the lowest levelsince 1996. The purchase market slowed to the lowest level of activity since1995, as the rapid rise in rates pushed an increasing number of potentialhomebuyers out of the market.”
On top of that, the recent JOLTS releaserattled the bond market as job openings smashed expectations. Yet, the data isalso more semblance than substance, as other metrics support weaker results inthe months ahead. Indeed’s Economic Research Director for North America NickBunker wrote on Oct. 3:
“Don’t be fooled into thinking thelongstanding cooldown in the labor market has suddenly reversed itself after anunexpectedly strong August. While the headline jump in openings was surprising,the large majority of the almost 700,000 increase in job openings came fromjust one industry – professional and business services – and is likely noisy.”
As further evidence, the quits datahighlights how the 2023 labor market is nothing like 2021 and 2022, and oil prices seemto have gotten the memo recently.
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To explain, more Americans quit theirjobs when the labor market is hot and do the opposite when it’s cold. And ifyou analyze the right side of the chart, you can see that quits barely budgedin August and remain firmly in a downtrend. Consequently, the metric continuesto follow a path that aligns with the last three recessions.
Overall, silver has suffered mightily, asour warning about higher nominal and real yields has come to fruition.Furthermore, with a stronger USD Index also part of the thesis, thedevelopments have rattled the S&P 500 too.So, while we may position for a short-term bounce, the medium-term trendremains down, in our opinion.
Again, subscribeto our premium Gold Trading Alert to stay ahead of the game.We’re on pace for an 11-trade winning streak, as the technicals have been anexcellent timing tool. Remember, the fundamentals are great for risk-rewardanalysis, but they are not our go-to resource for when to enter and exittrades. Therefore, subscribing is the best way to analyze all of our indicatorsin one place.
By Alex Demolitor
Alex Demolitor hails from Canada, and is across-asset strategist who has extensive macroeconomic experience. He hascompleted the Chartered Financial Analyst (CFA) program and specializes inpredicting the fundamental events that will impact assets in the stock,commodity, bond, and FX markets. His analyses are published at GoldPriceForecast.com.
Disclaimer
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