Silver is at a 2-year low, but it’s not gold that will determine what happens next, this analyst says

On such reversals are sustainable rallies potentially made, though there’s still a long way to go with the index down 17.3% for the year.

Silver bugs are having an even tougher time. The grey metal
SI00,
+0.48%
this week dropped below $18 an ounce for the first time since June 2020, having traded near $27 as recently as March. The iShares Silver Trust
SLV,
+1.16%
has lost nearly 23% for the year and Global X Silver Miners ETF
SIL,
+1.92%,
for example, has shed 38% so far in 2022.

So, what should investors do now if they are considering making a bet on the infamously volatile sector.

“Don’t pay attention to gold, pay attention to copper
HG00,
-0.15%
”, Ole Hansen, head of commodity strategy at Saxo Bank, told MarketWatch in a phone interview.

The reason for this is that unlike its precious metal peer gold, silver has extensive industrial uses, with up to 50% of supply used in areas like electronics and solar products. Fear of a global economic slowdown is thus hurting silver in addition to pressures from higher borrowing costs and a surging dollar that traditionally batter bullion, Hansen notes.

So, while gold is off about 6% this year, silver’s decline of 23% is similar to the 21% drop for copper, widely accepted as the industrial metal benchmark.

“Silver has not only been challenged by the weakness mentioned in gold but also, and more importantly, by China [economic] weakness related selling across industrial metals, especially copper.” Says Hansen.

However, he spies signs that the market may be oversold. “The rout in silver and copper, as well as zinc and aluminum, two metals that recently found support from smelters reducing capacity due to high energy costs, has by now reached the capitulation stage with silver having entered a previous consolidation range between $16.50 and 18.50.”

Should evidence emerge that inflation concerns are fading, causing the dollar to pull back and reducing fears that higher interest rates will curb growth, then the futures market may quickly find itself wrongfooted.

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

Should such a trend occur it would help silver recover some poise relative to its bullion peer.

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

Markets

It’s jobs Friday again and it certainly feels like Wall Street would rather see a soft nonfarm payrolls report than a strong one. That way the Fed may decide to be a bit more gentle in raising borrowing costs, is the reasoning.

In the event, a net 315,000 positions were created in August, down from 528,000 in July and only a few thousand lower than the 318,000 forecast by economists. The unemployment rate rose from 3.5% to 3.7% and earnings increased 0.3% over the month, lower than July’s 0.5%.

The initial reaction indeed was to consider the report showed a cooling labor market and this boosted equities, with S&P 500 futures
ES00,
+0.31%
up 0.6% to 3,994. The benchmark 10-year Treasury yield
TMUBMUSD10Y,
3.208%
fell 2 basis points to 3.246%.

The buzz

Traders are keeping a wary eye on the dollar
DXY,
-0.36%,
which has surged to a 20-year high as the Fed became more hawkish and fears build about prospects for the European economy amid the regions’ energy crisis. The euro
EURUSD,
+0.55%
is below buck parity and it takes more than 140 Japanese yen
USDJPY,
-0.05%
to buy one greenback.

Russia said it would stop selling oil to countries seeking to impose a price cap on crude. Brent
BRN00,
+2.13%,
the global benchmark, which on Thursday fell to a six month low near $93 a barrel, is up 2.2% to $88.50.

Popular fund manager Cathie Wood has bought more Nvidia
NVDA,
-1.11%,
taking advantage of the chipmaker’s latest slide to a fresh 52-week trough. She had trimmed her holding last month ahead of Nvidia’s results.

Lululemon shares
LULU,
+11.08%
jumped nearly 10% after the clothing retailer delivered well-received results and gave upbeat forecasts.

Shares in Starbucks
SBUX,
-1.60%
were holding much of the previous session’s gains as investors absorbed news that former Reckitt Benckiser CEO Laxman Narasimhan would lead the coffee shop chain.

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

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The chart

During the great financial crisis and the COVID-19 meltdown the Fed was keen to be seen supporting markets because it believes in the wealth effect. Simply put, this is the idea that when households feel richer because of rising asset values — such as stock or house prices — they will spend more and support the economy.

The problem is this means in order to slow the economy and curb inflation the Fed believes it must stop and even reverse the wealth effect. The chart below from Nomura shows how U.S. financial conditions have indeed experienced some “impulse tightening” again as both stocks and bonds have fallen. Unfortunately for bulls, the Fed will want to see this sustained for some time.

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