In an August 3 Barchart article, I asked, “Is Silver Setting Up for an Explosive Move Higher?” COMEX September silver futures were at the $23.715 level on August 3, when I wrote:
Given the technical trend and fundamental deficit, silver could experience significant price appreciation over the coming months and years. Silver mining shares would likely go along with the metal’s price for a bullish ride and could outperform silver appreciation on a percentage basis as the world depends on the miners to close the supply-demand gap. Buying gold and silver on price dips has been the optimal approach over the past years.
At $24.27 on August 23, September silver futures were slightly higher, while the Global X Silver Miners ETF (SIL) and ETFMG Prime Junior Silver Miners ETF (SILJ) kept pace with the metal, which provides few clues about the path of least resistance of silver’s price. 2023 is no ordinary year, and I continue to view silver and silver mining share prices as a golden buying opportunity.
Rangebound silver
While silver has threatened to break out to the up or downside since the end of 2022, the price has remained within a mostly $6 trading range.
The ten-year chart highlights the 2023 $19.83 to $26.20 trading range. At the $24.27 level on August 23, silver was above the $23.015 midpoint. So far, 2023 has been an inside year as silver’s peak is below the 2022 high, and the low is above the 2022 bottom. Silver continues to consolidate in August 2023.
Rising rates create fear
One of the primary factors weighing on silver and other metals prices in 2023 has been rising interest rates. Since March 2022, the U.S. Fed Funds Rate has increased from zero to 5.375%.
The iShares 20+ Year U.S. Treasury (TLT) ETF chart shows a more than 35% decline from $142.33 on March 1, 2022, to $92.23 per share on August 21, 2023. Yields on U.S. Treasury bonds have soared as quantitative tightening has pushed rates further along the yield curve higher.
The 30-Year conventional fixed-rate mortgage rate increased from below 3% in late 2021 to over 7% in August 2023.
Rising rates cause capital to flow from stocks and other assets to debt securities. Moreover, commodity prices tend to decline in a rising interest rate environment. The cost of carrying inventories increases, and investment demand declines. The trajectory of rate increases has caused fear in markets, weighing on asset prices, and silver has been no exception.
The three reasons why interest rates will stabilize
After an unprecedented period of rising interest rates, the odds favor stabilization over the coming months for three reasons.
- While the employment picture remains tight and wages are rising, the consumer and producer price indices have been trending lower, taking pressure off the Fed to increase rates.
- Interest rates have already increased substantially. It takes time for the rate hikes to filter through the economy, which is why the Fed will slow, if not pause, its tight monetary policy path.
- Monetary policy requires a delicate balance. The Fed received lots of criticism for waiting too long to address rising inflation in late 2020, 2021, and early 2022. The central bank will be wary of increasing rates too much and choking off economic growth. A soft landing requires a gentle approach to future rate hikes over the coming months.
Interest rates are likely to stabilize over the coming months. As the markets digest a lower trajectory of increases or stability, the capital could begin flowing from bonds into other assets offering the potential for capital growth.
A BRICS currency is bullish for gold and silver prices
Markets reflect the economic and geopolitical landscapes. The bifurcation of the world’s nuclear powers has increased the potential for a new currency to challenge the U.S. currency’s dominant role in the worldwide financial market.
Over the past months, the BRICS bloc of countries, including Brazil, Russia, India, China, South Africa, and their economic allies, have moved towards rolling out a BRICS currency with gold backing. A BRICS currency could challenge the U.S. dollar if it becomes a competing foreign exchange instrument for cross-border payments.
A decline in the U.S. dollar’s global role would likely cause its value to decrease. Gold and silver are commodities, but they also have long histories as means of exchange. Silver tends to follow gold prices, and a return to a gold standard for the BRICS currencies may lift dollar-based gold prices, causing silver to move to the upside. Therefore, a BRICS currency could be highly bullish for the leading precious metals prices in U.S. dollar terms.
Leave room to add, but keep buying silver and diversified silver mining shares
On August 3, September silver futures were at the $23.715 level. On August 23, they were 2.3% higher at $24.27 per ounce. Meanwhile, the diversified senior mining ETF (SIL) at $25.93 on August 23 was 3.9% higher than the $25.80 level on August 3. The junior mining ETF (SILJ) fell 1.05% to $9.52 on August 3 to $9.42 on August 23.
Typically, the lack of outperformance in the mining ETFs is a bearish sign for silver, and prices could slip toward the bottom end of the 2023 trading range over the coming weeks. However, the case for rising silver and gold prices remains compelling, which could make the lower SIL and SILJ prices bargains at the current levels. Silver mining shares tend to underperform on the downside and outperform the metal on the upside. When silver finds a bottom and turns higher, the mining shares could experience explosive gains.
I am a buyer of SIL and SILJ, leaving room to add on further declines, which I think will be the optimal long-term approach to the silver market for the coming years.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
