Are Silver’s Liquidity Dreams a Mirage?
Investing.com suggests that silver’s liquidity dreams may just be a mirage. While liquidity-fueled assets have been outperforming in 2023, it seems that the belief in rising interest rates and quantitative tightening (QT) won’t hinder their success. With silver and gold also benefiting from liquidity, the optimism surrounding the market assumes that liquidity no longer matters. However, this may be a short-term illusion, as the divergence between asset performance and liquidity suggests a major climax could occur in the medium term.
The article points to the declining balance sheets of the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ) as evidence that the central banks are siphoning liquidity out of the system. This policy action is expected to have significant consequences in the coming months. The first part of their bearish fundamental thesis is higher interest rates, and the second part is a looming recession. Despite the narrative of a soft landing, the indicators point to recession winds blowing, and historically, this has been an ominous sign for the economy.
One such indicator is the year-over-year (YoY) percentage change in U.S. industrial production. The article highlights that it recently went negative YoY for the first time since before the pandemic. Looking back at history, 18 out of the last 23 times U.S. industrial production has gone negative YoY, it has resulted in recessions. With storm clouds forming, it should not come as a surprise if an economic malaise arrives sooner rather than later.
To further support the notion of a liquidity drain, Bank of America’s second-quarter earnings reveal that consumers remain relatively cash-rich. Average deposit balances remain at multiples of their pre-pandemic levels, indicating that consumers are still in a healthy financial position. The continued consumer spending, driven by income rather than credit growth, has put the Federal Reserve in a hawkish position. As inflation persists due to rising oil prices, financial conditions are expected to tighten further.
While the misguided belief in a pivot away from liquidity has hurt the U.S. dollar, recent market movements suggest that interest rates and the USD Index are rallying. This further supports the argument that the Fed will continue to suppress the U.S. economy, impacting gold, silver, and mining stocks.
In conclusion, while silver may seem to be priced for perfection, the ongoing liquidity drain and the potential for an economic downturn suggest that a reality check may be on the horizon. Consumers’ robust financial position and the tightening of financial conditions indicate that the Federal Reserve’s efforts to combat inflation may have a significant impact on the economy. Whether silver’s liquidity-fueled dreams will prevail or dissolve remains to be seen, but the signs point to a potential climax in the medium term.
Note: This article is based on an opinion piece from Investing.com. The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Investing.com.
