As other assets suffer, the white metal remains uplifted
Anxiety caught up to investors on Apr. 20, as Bitcoin, the S&P 500 and crude oil showcased immense weakness. But, with the PMs assuming the fundamental issues don’t apply to them, silver largely brushed off its peers’ plight.
Yet, with complacency often coming back to bite investors, a volatility spike should shift sentiment dramatically over the medium term.
Please see below:
To explain, the candlesticks above track the weekly movement of the Cboe Volatility Index (VIX), while the black line at the bottom tracks its weekly RSI. If you analyze the horizontal green line, you can see that weekly VIX RSI readings below 40 are rare over the last 10+ years.
More importantly, the weekly metric approached 40 on Apr. 19 before the daily spike on Apr. 20 pushed it back up to ~42. As a result, with volatility poised to rise and other risk assets already paying attention, we believe silver’s rally should fail.
As further evidence, please see the discrepancy between the VIX and the VVIX.
To explain, the VIX tracks the S&P 500’s expected volatility over the next 30 days, while the VVIX tracks the expected volatility of the VIX. If you analyze the right side of the chart, you can see that the VVIX has risen sharply (the red line), while the VIX has risen moderately (the green line).
This VVIX’s outperformance highlights how traders expect the VIX to be much more volatile moving forward, which means the S&P 500 should showcase similar concern.
To that point, seasonality also favors rising volatility throughout May and June.
Please see below:
To explain, the blue line above shows how the VIX often bottoms near the end of April, then rises in May, falls again, then hits a new high in June. So, with the VIX’s clock turning bullish after next week, coupled with the rare weekly RSI reading, the data supports more uncertainty, which is bearish for silver.
Speaking of which, bearish seasonality is already upon silver.
Please see below:
To explain, the blue line above shows how silver often peaks in mid-to-late April, with substantial weakness following until the end of June. In a nutshell: May and June are when the white metal has suffered its worst historical performance.
Furthermore, the PMs’ recent rallies have been built on the notion that rate cuts and QE are on the horizon. When the Fed intervened to support troubled banks amid the deposit flight, its balance sheet rose. And while loans to financial institutions are not QE, investors ran with the idea anyway.
But, with the crisis calming, QT is back, and the developments have ominous implications for silver.
Please see below:
To explain, the Fed’s balance sheet has declined for four-straight weeks (updated on Apr. 20) since the intervention. And with the mild disinflation poised to reverse when base effects end in June, Fed officials remain steadfast with their hawkish warnings.
For example, Cleveland Fed President Loretta Mester said on Apr. 20:
“Demand is still outpacing supply in both product and labor markets and inflation remains too high. In order to put inflation on a sustained downward trajectory to 2%, I anticipate that monetary policy will need to move somewhat further into restrictive territory this year, with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time.”
In addition, Fed Governor Michelle Bowman said on Apr. 20:
“We clearly need to continue to work to bring inflation down.”
And Dallas Fed President Lorie Logan added on Apr. 20:
“As you surely know, inflation has been much too high…. The Fed has been focused on lowering inflation, which is essential if we want to support a growing economy and rising incomes.”
So, with the trio of speakers reiterating their commitment to reducing inflation, silver confronts a multitude of bearish developments as we look toward May and June. And while calling a top is difficult, we believe the risk-reward is heavily skewed to the downside.
Overall, bearish seasonality is here, the VIX should rise, the Fed’s balance sheet is shrinking again, and officials remain committed to further tightening. Thus, it's not a backdrop that supports a higher silver price.
Do you think silver will end May and June lower than where it is now?
Alex Demolitor
Precious Metals Strategist