Markets continued to be challenging this month. The US debt ceiling may be resolved, but it just means the can has been kicked down what is a dead-end road.
The debt deal also means a big chunk of debt issuance will be compressed into the next few months for the US Treasury to refill its coffers.
What’s that likely to do? We could start to see a reversal in cash accumulation. It could mean as much as $1.1 trillion of new T-bills issued this year. It could also mean a lot of bank deposit money flowing out, and into safer and higher-paying Treasuries.
You know where I’m going with this. That’s likely to mean even more pressure on banks that have been reeling since the start of this year. It will also mean banks will need to raise their own payout rates to compete (and hopefully retain some deposits). And it portends charging higher rates to borrowers, making funding more costly for businesses.
Can you feel the crushing vortex yet? This might support the US dollar, which will be in demand from foreign investors who want to also buy Treasuries. And that could keep some ongoing pressure on precious metals in the near term.
Right now it looks like a Fed rate hike may not happen in June, and instead will come at the July meeting. I think that too could bring some temporary strength to the dollar, also weighing on precious metals temporarily.
But we can’t rule out the possibility of both the dollar and precious metals rising together on balance for some time.
Silver’s been challenged lately. If you’re disappointed or discouraged, I get it. When silver soared from $20 to $26 between mid-March and mid-May sentiment was riding high. Since then, not so much.
But this is a long game. Remember, just last fall silver was at $18. If you have conviction about precious metals, and that the economic environment will only lead to higher demand, then this sector deserves not only your attention, but your investment dollars too.
That seemed to resonate with followers. I think this negative sentiment is working off an overbought condition in silver. I also think we are closing in on a bottom. I’m not saying it’s tomorrow, just getting closer.
And so, when I presented recently at the Metals Investor Forum in Vancouver a little over a week ago, my talk was titled “Silver Asymmetric Opportunity”. You can view that presentation here: Peter Krauth MIF May 2023. I made the case that the industry is becoming ripe for consolidation, as new deposits are becoming harder to find, production costs remain high, and ore grades keep falling.
In fact, recent research from Capitalight shows that mine supply concentration has been falling. In 2002 42% of silver was produced by the top 10 silver miners. Today that number reaches only 32%.
This bolsters the case that mergers and acquisition activity needs to take on a new life for production profiles to remain lucrative.
I have to say, at the recent Metals Investor Forum it was a pleasure connecting with well informed investors, as well as many of my subscribers who have excellent, thoughtful questions about the economy and individual companies in or outside the portfolio.
The bottom line is that the silver market balance is so out of whack, last year saw the largest recorded silver deficit. And the combined deficits of 2021 and 2022 more than wiped out the surpluses of the previous eleven years. The two biggest drivers of this are demand from investment and solar panels. Both hit all time record highs. And overall silver demand was up 18% last year (also a record), while supply barely increased 2%.
Considering the solar sector, BloombergNEF (a research service) recently upped its forecast for Chinese solar installations. They now see that nation adding almost triple the capacity they did in 2021, which is more than the total in all of the U.S. What’s more, EVs now account for more than one third of all Chinese vehicle sales. My take is these super bullish trends are simply not reflected in most silver demand forecasts.
At the end of last month, the outstanding In Gold We Trust report 2023: SHOWDOWN was released. This is a highly anticipated must read for anyone who wants to understand the state of the precious metals markets, along with the economic and geopolitical drivers that are shaping them.
I’m honored that I was asked to contribute to this year’s report, which you can download here: In Gold We Trust report 2023: SHOWDOWN. You will find the Silver’s Time to Shine? section starting on page 267. There’s also an interesting section, Without State Intervention – China’s Historic Silver Standard, staring on page 213.
At the Metals Investor Forum my colleague, Gwen Preston, highlighted a superb chart from this latest In Gold We Trust report
The red and blue shaded “mountain” is US inflation since 2020. The green and white shaded area shows that interest rates would need to be and stay at 1.1% beyond 2030 just to average at the Fed’s 2% target. And the red and white shaded area shows inflation would need to be at just 0.2% for the next 3 ½ years to reach the Fed’s average inflation of 2%.
Talk about putting things into perspective. That’s why I think this chart is so pertinent. What do you think the odds are of either of those outcomes? My guess is “extremely low”, and it’s why I continue to believe we’re in the “inflation decade.”
So what’s next for silver? My best guess is there’s a decent chance for a bit more near-term weakness which could pull the price down to about $22, where I think it would find strong support. But I still think recession or economic weakness is likely within 3-6 months, which could ultimately push gold and silver along with it, a lot higher. My target for later this year remains $28.
And what I find interesting, and surprising, is how more mainstream research is finally coming around to similar conclusions. A recent report from analysts at Citibank called for silver to potentially reach $30 in the next few months, and even “…$34/ounce still a distinct possibility over the next 6-12 months.” They think the fundamental drivers for the precious metals bull market has yet to fully play out. Citi’s analysts believe there’s more downside for the dollar, as do I. A MarketWatch article commented, “And it’s an asset that is prone to dramatic gains once investors wake up, since the market is tiny relative to the scale of speculative interest.”
Even MoneyWeek, the distinctly generalist retail investment website, recently published a well-rounded article on silver and its outlook: Investing in silver: the bull market has only just begun.
In this month’s issue of Silver Stock Investor I will review the silver section of the recent In Gold We Trust report, and provide some of my own comments and conclusions. I have some interesting data from other providers that reinforce my bullish stance on solar and silver’s role in it. This month I’m also adding a large, diversified silver producer with a very long history of operating top tier assets in the safest jurisdictions. I think it will perform very nicely over the next few years, especially as silver takes on an increasing share of their revenue streams. Its production output is set to grow by 40% over the next three years, with silver becoming a larger slice of the revenue pie.
If you’ve read my book, the Great Silver Bull, then the bullish outlook from technology and investment demand are no surprise. These are poised to soar in the coming months and years. In the book, I tell you exactly how you can prepare. I also discuss how tight physical silver markets have become, how high premiums have reached, and what alternative options you have.
If you haven’t picked up a copy yet, it’s easy, and it’s now also available in audiobook format!
Right now, silver appears to be continuing its consolidation phase. Once that’s over, I do think the next leg will be higher, with a potential to reach $28 this year.
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