Technical silver breakout confirmed as stagflation fears mount
Sat June 01 2024
Silver prices have surged to their highest levels since December 2012, driven by robust industrial demand and expectations of Federal Reserve interest rate cuts. Following a March technically confirmed breakout in gold with a monthly basis close above critical 13-year resistance at $2100, the silver price ended May trading on the COMEX this morning above major 12-year resistance at $30.
With the trend being solidly to the upside as silver continues to lead gold higher, this is classic precious metals bull market action. After a monthly close above stiff multi-year resistance at $30 silver this week, the expectation is that both gold and silver could rise further, with periods of backing and filling, as both have now broken through major multi-year technical resistance levels.
Gold is proving its role of maintaining purchasing power during periods of economic and political uncertainty and social upheaval. Geopolitical concerns, a growing sovereign debt crisis, and evidence of stagflation setting in have been the principal drivers for gold, and now silver, entering a new bull market.
Inflation is still a problem by remaining well above the Fed’s 2% target, while the economy is slowing well below 2% growth and that spells stagflation. Yet again, the Fed has missed the mark on stagflation as they did in the early 1970s. Back in early 2022, the Fed believed inflation would be “transitory,” and that the economy would come down for a “soft landing.”
By the end of 2023, Fed Chairman Jerome Powell believed the U.S. economy would enter the year with lower prices and see numerous cuts due to waning inflation coming closer to the central bank's fictional 2% target. Despite Powell still claiming not to see either 'the stag' or ‘the flation’, recent economic data points to the U.S. economy slowing, while inflation remains sticky.
More evidence of stagflation coming into the U.S. economy was presented this week, along with several weak bond auctions, pressuring stocks and bonds lower while gold and silver remain in strong uptrends.
Stocks and bonds continued their recent decline after another round of lackluster treasury auctions this week created more angst for investors. Concerns over funding the U.S. deficit means that yields will have to rise.
After this week’s bond auctions failed to produce the demand needed, bond yields climbed to their highest levels in over a month leaving the Fed and the economy in a box. Fed-speak teases investors about lower rates, but the central bank cannot commit. The economic data does not support a rate cut, but Fed-heads are trying desperately to send the message that rate cuts are coming.
The U.S. Bureau of Economic Analysis announced on Thursday that the preliminary reading of Q1 GDP showed that the economy grew 1.3% in the first three months of the new year, lower than the advance reading of 1.6% and down from 3.4% reported in the fourth quarter.
The report also noted mixed consumption data as consumers dip further into their savings and credit. The report said that personal income increased 0.3% last month, in line with expectations and down from the 0.5% reported in March.
The hike in the federal funds rate to a 23-year high between 5.25% and 5.50% has increased the cost of credit across the board, making it more expensive for consumers to take out debt. The cumulative amount of debt held by Americans totaled $17.69 trillion in the first quarter, with $1.12 trillion of that being on credit cards with an over 20% interest rate.
The share of people who were behind 90 days or more on their credit card payments in the quarter jumped to 10.7%, outdoing the pandemic high of 10% in the first quarter of 2021.
The lower-than-expected GDP data was followed by the U.S. Department of Commerce announcing this morning that its core Personal Consumption Expenditures (PCE) price index rose 0.2% in April.
Furthermore, hopes for a stabilizing U.S. housing market were dealt a severe blow this week after the number of potential home buyers collapsed in April. The U.S. pending home sales index dropped 7.7% in April, after March’s upwardly revised 3.6% rise. The data was much worse than forecasts, as economists were expecting to see only a 0.6% decline.
For the year, pending home sales fell -7.4% against expectations for a 0.5% increase, and after moving into positive territory with a 0.1% print in March. All four U.S. regions registered month-over-month and year-over-year declines, while home prices will rise a bit faster this year than previously expected due to limited available supply, according to analysts polled by Reuters.
A major factor that is never included in the inflation numbers is rising taxation. Government claims that taxes are the citizens’ obligation and not part of our cost of living. Joe Biden and his administration would like to implement a draconian 44.6% tax on capital gains, the highest tax on capital gains in the nation’s history.
Washington says the added tax is necessary to address the looming national debt, while government simultaneously implements measures to ensure that the nation falls deeper into debt. Perpetually issuing new debt to pay for the old is equivalent to a Ponzi scheme that will eventually fail. Read the full Biden administration Fiscal Year 2025 tax proposal here.
Trade wars have also ramped up recently, particularly between the U.S. and China, which is also inflationary. Interest payments on the debt are through the roof, while 70% of the nearly $35 trillion federal debt is accumulative interest. But in a crisis, the Fed can only print more money to pay off old maturing debt with new debt.
Numerous banks are in trouble and more collapses are expected, with commercial real estate being more susceptible to crisis during a higher-for-longer interest rate climate.
With the U.S. having trouble financing its debt, there remains risk of a sovereign debt crisis. As conflict between the U.S. and China heightens, China is on a clear path to unload its holdings of U.S. treasuries. China has already sold a record amount of Treasury and U.S. agency bonds in the first quarter, highlighting the Asian nation’s move to exit the U.S. debt market while using the proceeds to buy more gold.
The share of physical bullion in China's reserves climbed to 4.9% in April, the highest level recorded since central bank data collection began in 2015. Beijing dumped a total of US$53.3 billion of Treasuries and agency bonds combined in the first quarter, based on Bloomberg calculations of the latest data from the U.S. Department of the Treasury. Belgium, often seen as a custodian of China’s holdings, disposed of US$22 billion of Treasuries during the period.
Meanwhile, silver has recently been leading the gold price with an impressive gain of over 45% since bottoming in February at $22, and silver juniors continue to lead both gold and its miners. After being hated and ignored since peaking in mid-2020, many quality issues have finally begun to move higher with the silver price.
With the market cap of the entire silver mining sector being just $15 billion, we could see significant upside in the long-forgotten silver space into summer. Especially now that silver has technically broken out above multi-year stiff resistance at $30.
With silver still being mostly ignored by investors for the past several years, the silver equity complex may be the best trade right now and the one to watch going forward.
After the silver price broke out above multi-year resistance at $30 on a monthly closing basis in May, the metal appears to be on the verge of a major up-leg from a huge 4-year base. The last time silver prices broke above $30 per ounce in 2011, the precious metal went onto trade at $50 in the space of 100 days.
In anticipation of the incredible gains the junior sector will begin to experience now that the silver price has printed a technical breakout above $30 on a monthly closing basis, the Junior Miner Junky (JMJ) newsletter accumulated a basket of quality silver and gold juniors with 3x-10x upside potential into 2025-26.
If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.
Source: https://www.kitco.com/