Silver: The moment to take action has arrived
After an 8% correction to start 2024 and a rejection of sub-$22, one commodity that has recently grabbed our attention as a long-term value play is the March Silver contract. We anticipate that Silver prices are trading near a critical support trendline (see chart), and the downside remains limited. The fundamentals over the past two weeks have shifted, and any one catalyst could send prices back to the 2023 double-top high at $26.43.
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Silver has lagged behind other commodities due to its dependence on industrial applications and reliance on China as a consumer. China remains the largest consumer of Silver globally, consuming 18% of global fabrication. The problem is that after a disastrous 2023 and a 43% decline in Chinese stocks since the 2021 highs, China has finally taken extraordinary measures to step up and support its economy by injecting 278 billion dollars into it and cutting the reserve ratio by 50 bps. These measures are necessary given that Chinese consumer confidence is near all-time lows and GDP threatens multi-decade lows. Since announcing the stimulus measures, we have seen a surge in everything related to China, sending the Hang Seng up 7% and Copper up 5%.
While China may be one part of the puzzle, higher interest rates have been a significant headwind that is near coming to an end. The market could see our first interest rate cut as early as March, depending on upcoming economic data. We expect to see Fed Chairman Jerome Powell adjust the language from the December meeting and note that future policy changes will depend on inflation and other data. We will have two more rounds of inflation data and annual revisions to CPI before the March meeting.
Regardless of whether the first cut comes in March or May, we should see a chain reaction of events leading to a weaker U.S. Dollar followed by a steady stream of fund inflows into the Gold market. Historically, Gold has, on average, seen a 6% rise within 30 days of the first interest rate cut. Additionally, the Gold/Silver ratio is trading near 88:1, leaving Silver at a historically low valuation to Gold. Funds have also cut their bullish bets on Silver to 10-week lows, leaving them underinvested. With Silver's high beta nature, the returns after the first interest rate cut could significantly outperform Gold.