With silver gunning for its 2023 lows, the recent sell-off has done severe technical damage. And while the weakness has been a boon for our GDXJ ETF short position, silver could enjoy a meaningful bounce in the weeks ahead. Yet, the technicals are much better than the fundamentals at uncovering support and resistance.
As for the medium-term outlook, we remain bearish and will cover the fundamental metrics that keep us cautious. To begin, we’ve warned on numerous occasions that higher long-term interest rates (not the FFR) create recessions. And with the recent rate surge dominated by the long end, the chickens should come home to roost in the months ahead.
S&P Global and J.P. Morgan released their Global Composite PMI on Oct. 4. And with output already sputtering, the data should only worsen as higher long-term rates filter through the system. The report stated:
“Global economic growth remained lackluster at the end of the third quarter, as output edged higher and intakes of new work contracted for the first time in eight months. There were also signs of further weakness in the coming months, as backlogs of work fell sharply and business optimism dipped to a nine-month low.”
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Similarly, while gold could realize a short-term bounce if rates decline due to economic weakness, the medium-term consequences are still bearish. S&P Global’s U.S. Services PMI report stated:
“September data indicated a continued decline in new business at service sector firms. The rate of contraction quickened to the sharpest since December 2022, albeit still modest overall. Lower new orders were reportedly linked to weak domestic and foreign client demand, with new export orders falling for the first time in five months. The decrease in new export sales was the steepest since February and was in stark contrast to the solid expansion seen in July.”
So, while the ISM’s report was much more optimistic, we prioritized S&P Global’s data in 2021 and 2022 and will continue to do so now.
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The Mortgage Bankers Association (MBA) reported on Oct. 4 that its Market Composite Index declined by 6% week-over-week (WoW) as higher long-term rates make homes even more unaffordable. Moreover, the longer the gambit persists, the more it stresses the U.S. economy, and the more the USD Index should soar when an ominous event occurs. Joel Kan, MBA’s Vice President and Deputy Chief Economist, said:
“Mortgage rates continued to move higher last week as markets digested the recent upswing in Treasury yields. Rates for all mortgage products increased, with the 30-year fixed mortgage rate increasing for the fourth consecutive week to 7.53 percent – the highest rate since 2000.
“As a result, mortgage applications grounded to a halt, dropping to the lowest level since 1996. The purchase market slowed to the lowest level of activity since 1995, as the rapid rise in rates pushed an increasing number of potential homebuyers out of the market.”
On top of that, the recent JOLTS release rattled the bond market as job openings smashed expectations. Yet, the data is also more semblance than substance, as other metrics support weaker results in the months ahead. Indeed’s Economic Research Director for North America Nick Bunker wrote on Oct. 3:
“Don’t be fooled into thinking the longstanding cooldown in the labor market has suddenly reversed itself after an unexpectedly strong August. While the headline jump in openings was surprising, the large majority of the almost 700,000 increase in job openings came from just one industry – professional and business services – and is likely noisy.”
As further evidence, the quits data highlights how the 2023 labor market is nothing like 2021 and 2022, and oil prices seem to have gotten the memo recently.
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To explain, more Americans quit their jobs when the labor market is hot and do the opposite when it’s cold. And if you analyze the right side of the chart, you can see that quits barely budged in August and remain firmly in a downtrend. Consequently, the metric continues to follow a path that aligns with the last three recessions.
Overall, silver has suffered mightily, as our warning about higher nominal and real yields has come to fruition. Furthermore, with a stronger USD Index also part of the thesis, the developments have rattled the S&P 500 too. So, while we may position for a short-term bounce, the medium-term trend remains down, in our opinion.
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