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

A draw can feel like a loss if you were lining up for a win. Conversely, a draw can be celebrated if you were facing a loss.

After a series of sessions where early gains evaporated, traders will be relieved that on Thursday an initial sharp decline was reversed and the S&P 500 SPX,
+0.24%
ends gently on positive ground.

Such reversals are likely to see sustained rallies, although there is still a long way to go with the index down 17.3% for the year.

Silver bugs have an even harder time. The gray metal SI00,
+1.30%
this week it 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,
+1.71%
has lost nearly 23% for the year and the Global X Silver Miners ETF SIL,
+3.11%,
for example, it has lost 38% so far in 2022.

So, what should investors do now if they’re considering betting on the notoriously volatile sector.

“Never mind the gold, mind the copper HG00,
+0.04%
Ole Hansen, head of commodity strategy at Saxo Bank, told MarketWatch in a phone interview.

The reason for this is that unlike the precious metal gold, silver has extensive industrial uses, with up to 50% of the supply being used in areas such as electronics and solar products. Fears of a global economic slowdown are thus weighing on silver in addition to pressures from higher borrowing costs and a rising dollar that have traditionally hit gold, Hansen notes.

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

“Silver was challenged not only by the weakness reported in gold but also, and more importantly, by China [economic] related to weak sales in industrial metals, especially copper.’ Hansen says.

However, he spies signs that the market may be oversold. “The spillover into silver and copper, as well as zinc and aluminum, two metals that have recently found support from smelters cutting capacity due to high energy costs, has now reached the capitulation stage with silver entering an earlier consolidation range between $16.50 and $18.50.”

If there are signs that inflation concerns are fading, causing the dollar to retreat and easing fears that higher interest rates will curb growth, then the futures market could quickly find itself wrong.

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

Source: Saxo Group

Should such a trend emerge, it would help silver regain some balance against its gold counterpart.

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

markets

It’s jobs again on Friday, and it sure looks like Wall Street would rather see a soft nonfarm payrolls report than a strong one. That way the Fed may decide to be a little more lenient in raising borrowing costs, the reasoning goes.

In that case, a net 315,000 jobs were created in August, up from 528,000 in July and just a few thousand below the 318,000 economists had forecast. The jobless rate rose from 3.5% to 3.7% and earnings rose 0.3% during the month, down from July’s 0.5%.

The initial reaction was indeed to see the report as pointing to a cold labor market, and that boosted stocks, with S&P 500 ES00 futures,
+0.57%
up 0.6% to 3,994. The yield on the benchmark 10-year bond TMUBMUSD10Y,
3.195%
fell 2 basis points to 3.246%.

The hum

Traders are keeping a close eye on the dollar DXY,
-0.42%,
which has soared to a 20-year high as the Fed grew more hawkish and fears mount about the outlook for the European economy amid the regions energy crisis. The euro EURUSD,
+0.52%
are below the dollar rate and need more than 140 Japanese Yen USDJPY,
-0.04%
to buy a dollar.

Russia has said it will stop selling oil to countries seeking to impose a crude price cap. Brent BRN00,
+2.20%,
the global benchmark, which on Thursday fell to a six-month low near $93 a barrel, rose 2.2 percent to $88.50.

Popular fund manager Cathie Wood bought more Nvidia NVDA,
-1.55%,
taking advantage of the chipmaker’s latest slide into a new 52-week threshold. It had cut its stake last month ahead of Nvidia’s results.

Lululemon shares of LULU,
+10.19%
jumped nearly 10% after the clothing retailer reported strong results and gave an upbeat forecast.

Shares in Starbucks SBUX,
-2.21%
held much of the previous session’s gains as investors absorbed news that former Reckitt Benckiser CEO Laxman Narasimhan would head 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 wanted to appear to be supporting the markets because it believed in the wealth effect. Simply put, this is the idea that when households feel wealthier due to rising asset values—such as stock or house prices—they will spend more and support the economy.

The problem is that this means, in order to slow the economy and contain inflation, the Fed believes it must stop and even reverse the wealth effect. The chart below from Nomura shows how US economic conditions have indeed experienced some “impulsive tightening” as both stocks and bonds have retreated. Unfortunately for the bulls, the Fed will want to see this hold for some time.

Source: Nomura

Top indicators

Here were the most active stocks on MarketWatch as of 6 a.m. east.

Heart

Security name

TSLA,
-0.76%

Tesla

GM,
-1.36%

Gamestop

BBBY,
-3.90%

Bed Bath & Beyond

AMC,
-2.27%

AMC Entertainment

MONKEY,
+2.18%

AMC Entertainment preferred

NVDA,
-1.55%

Nvidia

AAPL,
+0.53%

apple

NIO,
-5.00%

NIO

AVCT,
-1.82%

American Virtual Cloud Technologies

BIAF,
+24.35%

BioAffinity Technologies

Random readings

Sticker shock

The passenger flips on the way back

First photo of an exoplanet

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