Written by: Arkadiusz Sieron, PhD
According to the Alchemist, 2023 will offer great opportunities for silver investors. What should we do to benefit?
The end is near… the end of 2022, of course! Hereby, I declare the season for 2023 outlooks officially open! I’ll share my own detailed predictions later this month, but let’s begin approaching this key and hot issue. For starters, let’s analyze Jonathan Butler’s article “Precious metals in a time of high inflation and rising interest rates” from the latest edition of the LMBA’s Alchemist.
The main thesis of this text is that inflation will remain consistently high next year. Combined with a still tight labor market, it’s a recipe for the continuation of the Fed’s tightening cycle. As a consequence, the greenback could continue its bullish trend and exert downward pressure on silver and gold prices. Additionally, an economic slowdown could reduce the industrial demand for silver, adding pressure on its prices.
Headwinds Are Changing into Tailwinds
However, there will also be tailwinds for the precious metals. First of all, the Fed’s rate hikes will eventually slow the economy. A recession is likely to start next year. This will entail two important effects. First, the Fed’s stance will become more and more dovish within the upcoming months. The pace of interest rate hikes will soften and, at some point, the Fed will say “enough”. I even bet that the U.S. central bank could start cutting the federal funds rate next year. Such a shift in the American monetary policy would boost silver prices.
Second, an economic downturn will increase the demand for gold and silver for the purpose of hedging and risk mitigation. As Butler writes,
ongoing aggressive rate hikes are likely to eventually slow the economy and result in a landscape of high inflation and weaker growth – one in which precious metals can provide portfolio diversification and help manage downside risks.
Given that we could have both high inflation and recession – i.e., stagflation – we could see “a greater degree of speculation over rate decisions manifest in higher market volatility”. As a consequence, safe-haven demand for silver could increase in 2023.
Implications for Silver
Please take a look at the chart below. As you can see, the price of silver has recently rebounded to about $23 per ounce. I can’t exclude the possibility that it was just a bullish wave within a long-term bearish trend.
However, given the inversion of the yield curve and other indicators also flashing recession, it seems to me that silver started to smell the outright downturn and is preparing for its next rally. This year wasn’t the best for silver because of the aggressive rate hikes. But 2023 could be a year of still relatively high inflation, softer economy and a more dovish monetary policy, so it should be better for the precious metals.
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