Precious metals prices are soaring in the wake of last week's disastrous payroll number. The latest nonfarm payroll print at 142,000 with the prior revision from 173,000 to 136,000 underlining the softness in job creation metrics. While most market analysts are looking for numbers in the 200,000 range to signal sustainable job creation and potential liftoff, the latest data confirms that the Federal Reserve is increasingly likely to miss the window for exiting zero interest rates. Dollar momentum has been dented by the latest data, helping to foment a further rally in silver prices after the precious metal broke through a key technical level on the upside. However, while the Federal Reserve might have shifted back its timetable, a dollar funding crisis might pave the way for further losses in precious metals once the music stops.
The Fundamental Picture
Similar to other precious metals prices, silver prices are commonly used as a hedge against inflation and money printing by Central Banks. At this point, considering the pool of global liquidity unleashed by global institutions, it is surprising that silver prices have not risen further as the outlook for monetary policy sours. However, in truth, there are two major fundamental factors pressuring prices lower over the medium-term including the end of asset purchases and widespread deflation. Although policymakers will typically caution against using the word as it summarizes a failure of quantitative easing, deflation is about to become more widespread as evidenced by the latest trends in advanced economies such as the United Kingdom, Euro Area, Germany, and Spain. The United States is unlikely to be far behind when it comes to the deflationary trend.
While in the paper market silver prices have the potential to fall sharply based on outstanding fundamental indicators, namely inflation especially for dollar-denominated prices, the physical market for silver is much tighter. Recent trends show that demand for bullion continues to edge higher, with the US Mint recording the highest sales since 1986 in the third quarter. Accordingly, some global mints have been setting quotas for sales as a result of soaring demand that is creating stress on the existing supply chain and manufacturing capabilities. Many investors are eyeing the sharp spread between gold and silvers prices as a buying opportunity to take physical at a substantial discount to gold. However, much of the momentum is being driven at the moment by retail investors in what can be a worrying sign for the recent price rally. Typically, retail investors are noted for being behind the curve and signal counter-momentum in the opposite direction.
