In the current climate, the dollar is the only fundamental factor one needs to look at when analyzing precious metals. The days when precious metals moved wildly as a safe haven for geopolitical risk are all but gone. Sure, they move a few bucks here of there, but short of an ACTUAL global event, they revert back to trading inversely to the US dollar. They don’t even have the supply and demand confusion that other commodities do. Crude oil has hurricanes and well profitability, copper has potential supply disruptions due to miner strikes and sometimes earthquakes as we saw yesterday in Chile. Gold and silver though? The dollar is its driver. See below:
Speaking specifically about silver since it is also an industrial metal, we find very little fluctuations in its supply and demand dynamics as of late. For years we looked at the gold-silver ratio to try and predict which of the 2 metals would outperform the other. The ratio used to move quite a bit, hitting a 38-year low just above 14 and high close to 99, but in the last 3 years, it has fluctuated between the low 70’s and the low 80’s. It currently stands at about 76. The idea was that when economies grow, silver would be in demand. New technologies create new uses for silver as an electrical conductor but also takes silver away as in digital photography.
Precious metals used to be an inflation hedge but there really isn’t strong inflationary pressure showing in the economy. This is the direct cause of the inverses dollar relationship. Traditionally, inflation meant an expansion in the money supply, again making the trade about the dollar. More dollars means they are not worth as much so the dollar gets weak and silver gets strong. As central banks raise rates to reign in inflation the dollar gets stronger and silver gets weaker.
The US Fed may finally have the markets convinced that rates need to rise and if that's the case, then expect more dollar strength and more abuse of silver longs.