Silver is preparing to take highs due to a weak dollar
2023.01.20 09:06
Silver is preparing to take highs due to a weak dollar
The economic data make it abundantly clear that the U.S. economy is slowing down, with a decline that is greater than anticipated. If the Fed stops increasing interest rates, could fly with a recession imminent.
After a downwardly revised drop of 1% in November, retail sales fell 1.1% in December. The decrease was the largest in a year and was greater than anticipated. Given that we are discussing the shopping season for the holidays, the fall is concerning. However, the decrease in price resulted in a partial decrease in sales.
Industrial production also fell by 0.7% in December, which was a negative surprise. It was larger than anticipated and came after a decrease of 0.6 percent in November. Manufacturing output, which was down 1.3% in December and 2.5% annually in the fourth quarter, was primarily to blame for the drop. Demand for goods suffers as a result of inflation and higher interest rates.
The most recent edition of the Beige Book is also not optimistic. The report says that over the past few weeks, five of the Fed’s districts reported slight or modest increases in overall economic activity. Six people said there was no change or a slight decline from the previous reporting period, and one person said there was a big drop.
The Fed may choose to further slow down the rate at which it raises interest rates in response to the disinflationary pressure and widespread indications of weakening demand. This is what Philadelphia Fed President Patrick Harker suggested this week:
“There are signs that hot inflation is cooling off, so he’s ready for the U.S. central bank to move to a slower pace of interest rate increases,”
In her inaugural major policy speech at the new position, Dallas Fed President Lorie Logan expressed a similar viewpoint:
“It’s a good idea to slow down if you’re on a road trip and there is fog or a dangerous highway. Similarly, if you are a policymaker in today’s complex economic and financial environment, I supported the Federal Reserve’s decision to slow rate increases last month. Additionally, the same factors suggest further sluggishness at the upcoming meeting.”
According to the CME FedWatch Tool, futures traders also bet on this scenario because they see a more than 95% chance of a 25 basis point increase in two weeks. Silver prices would fundamentally benefit from a slowdown in hikes.
What implications does this have for the outlook for silver and 2023? The Fed may be less likely to raise interest rates as a result of the falling rate and weakening economic momentum. The upward trend that began in November 2022 should be supported by any indications of a more dovish monetary policy for silver (see the chart below, courtesy of silverpriceforecast.com).
Additionally, as the U.S. economy slows down, concerns about a recession should grow, increasing demand for precious metals as a safe haven.
Yesterday’s decline in silver prices was unexpected. However, it could have been a reaction to some hawkish remarks made by Fed officials Bullard and Mester regarding the necessity of raising the federal funds rate above 5% or a normal correction (please keep in mind that silver is partially an industrial metal). However, this year, these two hawks are not voting members.
Therefore, concentrate on the fundamental trends rather than the market noise. And they are obvious: The economy is slowing down, which will eventually cause the Fed to slow down or even stop raising rates.
Disclaimer: Please be aware that the purpose of the preceding analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold. However, the purpose of this analysis is not to predict whether the price of gold will rise or fall in the near or medium term. The sentiment, chart patterns, cycles, indicators, ratios, and self-similar patterns are just a few of the additional factors that need to be taken into account in order to determine the latter, and we are taking these factors into consideration in addition to discussing the outlook for the short- and medium-term in our trading alerts.
