LAWRIE WILLIAMS: Silver price vulnerable to further falls this year
Writing here recently, we predicted that gold would soon breach the $1,700 level and silver $21. Both have since come true but while gold has managed to hang on, barely, and is still just holding on to the $1,700 level as I write, silver has been unable to hold on. Indeed it has fallen back almost a dollar to the $20.20s and according to some commentators is likely, as always seems to be the case, to suffer further price headwinds despite some apparently very positive supply/demand fundamentals.
The cause, according to specialist London-based precious metals consultancy, Metals Focus, is that investment demand remains weak in the face of likely Fed interest rate policy in the U.S. and resultant U.S. dollar strength. This flies in the face of almost record demand in at least one of the world’s biggest markets for silver – India – where silver bullion imports have already reached over 6,000 tonnes and the forthcoming wedding and festival season could well propel this to a new record annual high above 2015’s 7,530 tonnes. There appears to be demand strength in other major silver-consuming markets too.
Metals Focus also reports a decline in global silver inventories with London vault holdings at their lowest for some years and COMEX inventories in the U.S. at 313 million ounces – the lowest level since June 2020. The consultancy also sees another substantial supply deficit in the current year,
Despite all this seemingly positive data for the metal, Metals Focus still expects silver prices to be even lower at the year-end, though. The consultancy reckons the price had been driven up by what it saw as a temporary 12% short squeeze rally at the beginning of the week brought about by short term, and misguided, changes in interest rate expectations, some of which we had highlighted in our comments on the volatility in market expectations as demonstrated by fluctuations in the CME’s Fedwatch Tool. This has shown some considerable short term volatility, but is again currently pointing to a return to a more aggressive interest rate raising approach by the U.S. Fed at the next FOMC meeting due at the beginning of November. If this comes about it is certainly supportive of the Metals Focus consultancy’s case for silver price weakness ahead – and maybe further gold price weakness too.
Of course data releases suggesting the Fed’s anti-inflation measures may be having some effect between now and the FOMC meeting could yet cause the central bank to change course. Notable among these will be next week’s Consumer Price Index (CPI) release and if this shows a reduction in the core inflation level, which seems unlikely following the disappointing recent PCE core inflation rise, it could cause the Fed to mitigate its likely aggressive rate increase to 50 basis points and bring down the likely year-end interest rate level accordingly. But at the moment the market is still anticipating a year-end rate of between 4.25 and 4.5% (some are even predicting 4.5-4.75%), well into recession territory. We may see a fall in the headline year-on-year inflation rate, but as we have stated here before it will be the core inflation rate which will be the key for the Fed, and it may well see a couple more months before higher interest rates start to have any impact on that.
There is a chance, though, as suggested by some economists, that the Fed might change course anyway and reduce some of its aggressive stance in order to protect the U.S. economy from what seems a likely hard landing. If employment statistics, which have been holding up well so far, start to turn south, then this could become increasingly likely. Keep a wary eye on U.S. data releases. What happens to the U.S. economy tends to colour that of the rest of the world.