You are currently viewing Silver is at a 2-year low, but gold won’t determine what happens next, this analyst says

Silver is at a 2-year low, but gold won’t determine what happens next, this analyst says

A tie can look like a loss if you were in line for a win. Conversely, a draw can be celebrated if you face defeat.

After a number of sessions in which early gains evaporated, traders will be relieved that Thursday saw a strong initial decline reversed and the S&P 500 SPX,
+0.30%
finish slightly in positive territory.

On such reversals, lasting rallies are potentially achieved, although there is still a long way to go with the index down 17.3% for the year.

The silver bugs are going through an even tougher time. SI00 metallic gray,
+0.67%
this week fell below $18 an ounce for the first time since June 2020, having traded near $27 as recently as March. The iShares Silver Trust SLV,
-1.21%
lost almost 23% on the year and Global X Silver Miners ETF SIL,
-3.99%,
for example, has lost 38% so far in 2022.

So what should investors do now if they are considering betting on the infamously volatile sector.

“Don’t mind the gold, mind the copper HG00,
-0.40%
Ole Hansen, head of commodities strategy at Saxo Bank, told MarketWatch in a phone interview.

This is because, unlike its precious metal counterpart, gold, silver has many industrial uses, with up to 50% of the supply used in areas such as electronics and solar products. . Fear of a global economic slowdown is therefore hurting silver, in addition to the pressures from rising borrowing costs and a surging dollar that traditionally hit bullion, Hansen notes.

So while gold is down around 6% this year, silver’s 23% drop is similar to copper’s 21% drop, widely accepted as the benchmark for industrial metals.

“Silver was not only challenged by the mentioned weakness in gold but also, and above all, by China. [economic] sell-off linked to weakness in industrial metals, particularly copper. Says Hansen.

However, he is watching for signs that the market may be oversold. “The rout of silver and copper, along with zinc and aluminum, two metals that have recently found support from smelters cutting capacity due to high energy costs, has now reached the stage of the capitulation, as silver entered a previous consolidation range between $16.50 and $18.50.”

If inflation fears appear to be waning, driving the dollar lower and reducing fears that higher interest rates will dampen growth, the futures market could quickly find itself on the wrong foot.

“Speculators already hold net short positions in both metals, and it would take a change in the technical and/or fundamental outlook to turn those short positions into a tailwind through short hedging,” Hansen says.

Source: Saxo Group

If such a trend were to occur, it would help silver regain some balance against its bullion counterpart.

“The gold-silver ratio, last at 96 (ounces of silver per ounce of gold) retraced over 50% of the 2020-2021 collapse from 127 to 62 with the next resistance level around 102.5 , a further 6% potential underperformance against gold, while a break below 94 would be the first signal of a return to strength,” Hansen says.

Markets

S&P 500 ES00 futures contracts,
-0.06%
were little changed at 3,968 ahead of the jobs data. The benchmark 10-year Treasury yield TMUBMUSD10Y,
3.245%
rose less than 1 basis point to 3.266%. Bitcoin rose 0.2% to $20,119. US Natural Gas Futures NG00,
-2.88%
fell 2% to $9.073 per million British thermal units as gas prices in Europe also weakened.

The buzz

It’s employment again on Friday and it certainly feels like Wall Street would rather see a weak nonfarm payrolls report than a strong one. That way, the Fed could decide to be a little softer on raising borrowing costs, that’s the reasoning. Economists forecast that 318,000 net jobs were added in August, compared to 528,000 in July, and that the average hourly wage rose by 0.4% compared to 0.5% in the previous month.

Traders are also keeping a close eye on the DXY dollar,
-0.27%,
which hit a 20-year high as the Fed became more hawkish and fears grew over the outlook for the European economy amid the regions’ energy crisis. EURUSD euro,
+0.48%
is below the dollar parity and it takes more than 140 Japanese yen USDJPY,
+0.13%
to buy a green ticket.

Russia has said it will stop selling oil to countries seeking to impose a price cap on crude. Brent BRN00,
+1.43%,
the global benchmark, which fell to a six-month low near $93 a barrel on Thursday, was up 2.2% at $88.50.

Popular fund manager Cathie Wood bought more Nvidia NVDA,
-7.67%,
taking advantage of the chipmaker’s latest slide to a fresh 52-week low. It had reduced its stake last month ahead of Nvidia’s results.

Lululemon shares LULU,
-1.84%
jumped nearly 10% after the clothing retailer reported well-received results and gave an upbeat forecast.

Shares in Starbucks SBUX,
+1.58%
held much of the previous session’s gains as investors absorbed news that former Reckitt Benckiser CEO Laxman Narasimhan would lead the coffeehouse chain.

Bond markets entered their first bear market in at least 30 years.

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Table

During the Great Financial Crisis and the collapse of COVID-19, the Fed was keen to be seen as supporting the markets because it believes in the wealth effect. Simply put, it’s the idea that when households feel wealthier due to rising asset values ​​– like stock or house prices – they will spend more and support the economy.

The problem is that this means, to slow the economy and curb inflation, believes that the Fed must stop and even reverse the wealth effect. The chart below from Nomura shows how US financial conditions have indeed experienced an “impulsive tightening” again as stocks and bonds have fallen. Unfortunately for bulls, the Fed will want this to hold for a while.

Source: Nomura

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