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Silver hits two-year low, but gold won’t decide what happens next, says analyst

If you lined up for victory, a draw can feel like a loss.

After many sessions of early gains fading away, traders said Thursday that the first sharp decline was canceled and the S&P 500 SPX,
-0.35%
It ends gently in positive territory.

A reversal like this could make for a sustainable rally, but there is still a long way to go before the index drops 17.3% this year.

Silver bugs are going through a tougher time. Gray metal SI00,
+1.69%
It fell below $18 per ounce this week for the first time since June 2020 and was trading near $27 in March. iShares Silver Trust SLV,
+1.56%
Global X Silver Miners ETF SIL,
+3.77%,
For example, by 2022 it has fallen by 38% so far.

So what should investors do now if they are considering investing in a notoriously volatile sector?

“Don’t beware of gold, beware of copper HG00,
+0.12%
Ole Hansen, head of commodities strategy at Saxo Bank, told MarketWatch in a telephone interview.

The reason is that unlike the precious metal Piergold, silver has extensive industrial uses, with up to 50% of the supply being used in areas such as electronics and solar products. Thus, fears of a global economic slowdown, along with pressure from rising borrowing costs and a strong dollar that traditionally beats bullion, are hurting silver, Hansen said.

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

“Silver has been challenged not only by the weaknesses mentioned by Gold, but more importantly by China. [economic] Bearish-related selling across industrial metals, especially copper. ’ says Hansen.

But he sees signs that the market may be oversold. “Silver and copper, and zinc and aluminum crashes, two metals that have recently gained support from smelters that are reducing capacity due to high energy costs, have now reached a yielding stage, and silver has entered a consolidation range between the previous $16.50 and $18.50.

Futures markets could be on their feet anytime soon if inflation fears fade, the dollar weakens, and there is less evidence that fears that higher interest rates will hold back growth.

“Speculators already have net short positions in both metals and to turn these short positions into tailwinds through short covering would require a change in the technical and/or fundamental outlook,” said Hansen. say.

Source: Saxo Group

Such a trend would help silver regain some composure relative to its bullion peers.

“The gold-to-silver ratio ended at 96 (ounces of silver per ounce of gold), reversing more than 50% of the 2020-2021 collapse from 127 to 62, with the next resistance level near 102.5. , could underperform by another 6%, while a break below 94 would be the first signal that strength is starting to pick up,” says Hansen.

market

Friday is work again and it feels like Wall Street would prefer to see a softer report than a strong nonfarm payrolls report. The reason is that you may decide to be a little more gentle with the

The event created 315,000 net positions in August from 528,000 in July, just a few thousand fewer than the economists’ forecast of 318,000. The unemployment rate rose to 3.7% from 3.5% and earnings increased 0.3%, lower than his 0.5% in July.

In fact, the first reaction was that the report indicated a cooling in the labor market, which led to the S&P 500 futures ES00,
-0.06%
3,994, up 0.6%. Benchmark 10-Year Government Bond Yield TMUBMUSD10Y,
3.199%
It dropped 2 basis points to 3.246%.

Buzz

Traders are keeping a cautious eye on the dollar DXY.
-0.16%,
This surged to a 20-year high as the Federal Reserve became more hawkish and concerns grew about the outlook for the European economy amid the regional energy crisis.Euro EURUSD,
+0.22%
If it falls below the back parity and costs more than 140 yen in USDJPY,
-0.04%
buy one dollar

Russia said it would stop selling oil to countries seeking to cap oil prices. Brent BRN00,
+1.09%,
The global benchmark, which fell to a six-month low near $93 a barrel on Thursday, rose 2.2% to $88.50.

Popular fund manager Kathy Wood bought more Nvidia NVDA.
-1.68%,
We’ve taken advantage of the latest slides from chipmakers to set a new 52-week low. She had cut her stake last month ahead of Nvidia’s results.

lululemon shares LULU,
+7.30%
Sales jumped nearly 10% after the clothing retailer’s positive reception and optimistic outlook.

Starbucks SBUX stock,
-2.24%
Investors retained much of the gains from the previous session as they absorbed the news that former Reckitt Benckiser CEO Laxman Narasimhan would head up the coffee shop chain.

The bond market has entered a bear market for the first time in at least 30 years.

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chart

During the Great Financial Crisis and COVID-19 meltdown, the Fed was eager to help the market because it believes in the wealth effect. Simply put, the idea is that when households feel richer due to rising asset values ​​such as stocks and house prices, they will spend more to support the economy.

The problem is that the Fed believes that in order for this to slow the economy and keep inflation under control, the wealth effect needs to stop and even reverse. Nomura’s chart below shows that US financial conditions have indeed experienced another “impulsive tightening” as both stocks and bonds fell. Unfortunately for the bulls, the Fed would like this situation to continue for some time.

Source: Nomura

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