Silver is at a two-year low, but it is not gold that will determine what happens next, says this analyst

A draw can feel like a loss if you’re in line for victory. Conversely, a draw can be celebrated if you are facing defeat.

After a number of sessions when early gains evaporated, traders will be relieved that Thursday saw the cancellation of an initial sharp decline and the cancellation of the S&P 500 SPX
It ends moderately in the positive territory.

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

Silver bugs are having a harder time. Gray metal SI00
This week it fell below $18 an ounce for the first time since June 2020, after trading near $27 in March. iShares Silver Trust SLV
Lost nearly 23% for the year and Global X Silver Miners ETF SILAnd the
For example, it’s down 38% so far in 2022.

So, what should investors do now if they are considering betting on the notorious sector.

“Don’t worry about gold, pay attention to copper HG00
Ole Hansen, head of commodity strategy at Saxo Bank, told MarketWatch in a phone interview.

The reason for this is that unlike gold a precious metal, silver has extensive industrial uses, with up to 50% of the supply being used in areas such as electronics and solar energy products. Hansen notes that fear of a global economic slowdown is hurting silver as well as pressures from higher borrowing costs and a rising dollar that traditionally hits bullion.

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

“Silver has not only been challenged by the aforementioned weakness of gold but also, and more importantly, by China [economic] Poor selling associated with industrial metals, especially copper.” says Hansen.

However, he is spying on signals that the market may be in oversold territory. “The defeat in silver and copper, as well as zinc and aluminum, two metals that have recently found support from smelters that reduce capacity due to rising energy costs, have now come to a capitulation point with silver entering a previous consolidation range between $16.50 and $18.50.”

If evidence emerges that inflation fears are fading, causing the dollar to slump and reducing fears that higher interest rates will dampen growth, the futures market could quickly find itself in the wrong position.

“Speculators are already holding net short positions in both metals, and it will take a change in technical and/or fundamental outlook to turn these short positions into a tailwind by shorting,” Hansen says.

Source: Saxo Group

Should such a trend occur, it would help silver restore some balance relative to its alloy counterpart.

“The gold to silver ratio, which was last at 96 (ounces of silver per ounce of gold) has recovered more than 50% of the breakdown from 2020 to 2021 from 127 to 62 with the next level of resistance around 102.5, which is another potential drop. By 6% for gold, while a break below 94 would be the first sign that strength is starting to return, Hansen says.

markets

It’s Friday jobs again, and Wall Street sure would rather see a weak nonfarm payroll report than a strong one. This way the Fed may decide to be more gentle in raising borrowing costs, which is why.

In this case, 315,000 net jobs were created in August, down from 528,000 in July and just a few thousand less than economists’ expectations of 318,000. The unemployment rate rose from 3.5% to 3.7% and earnings increased 0.3% during the month, less than 0.5% in July.

The initial reaction already was to look at the report that showed a calming in the labor market and this boosted stocks, with S&P 500 futures ES00
It rose 0.6% to 3,994. BX 10-Year Standard Treasury Yield: TMUBMUSD10Y
It fell two basis points to 3.246%.

commotion

Traders Watching Caution on the Dollar DXYAnd the
Which rose to a 20-year high as the Fed became more hawkish and concerns about the prospects for the European economy grew amid the region’s energy crisis. EURUSD
It is less than buck parity and takes more than 140 JPY USDJPY
to buy one dollar.

Russia has said it will stop selling oil to countries that seek to impose a ceiling on the price of crude. Brent BRN00And the
The global benchmark, which fell on Thursday to a six-month low near $93 a barrel, rose 2.2% to $88.50.

Famous fund manager Cathie Wood has bought more from Nvidia NVDAAnd the
Benefit from the latest chipmaker chip to a new 52-week tub. She had trimmed her contract last month before the Nvidia results.

Lululemon LULU stock
It jumped nearly 10% after the apparel retailer reported good results and gave an optimistic forecast.

Share in Starbucks SBUX
It held most of the previous session’s gains as investors digested the news that ex-CEO of Reckitt Benckiser Laxman Narasemhan would lead the coffee shop chain.

Bond markets entered their first bear market in at least 30 years.

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During the major financial crisis and the collapse of COVID-19, the Fed was eager to be seen as supporting the markets because it believed in the wealth effect. Simply put, this is the idea that when households feel richer because of rising asset values ​​- such as stock or home prices – they will spend more and support the economy.

The problem is that this means that in order to slow the economy and curb inflation, the Fed believes it must halt and even reverse the wealth effect. The chart below from Nomura shows how US financial conditions have already seen some “impulsive tightening” again as stocks and bonds fall. Unfortunately for the bulls, the Fed will want to see this sustained for some time.

Source: Nomura

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