September Volatility Points to a Bullish Setup For Silver

As we approach a likely rate cut in September, get ready for volatility... and a bullish setup for silver.

A recent Producer Price Index reading showed a year-over-year reading of 2.2%, well below the previous month’s 2.7%. But if you look under the hood, the reading was lower thanks to the trade category which measures profit margins. When stripped out, the PPI was actually up 0.3%.

So, inflation may not fall much at all, yet the Fed’s about to cut. Go figure.

Sounds like the perfect environment for silver…

Meanwhile, bond traders are pricing in higher default risks. That’s concerning. The cost to insure against bond defaults - these are called credit default swaps (CDS) - recently jumped to a six-month high.

In my last issue of Silver Stock Investor, I said one reason to remain cautious on silver and gold was the Gold Miners Bullish Percent Index, which tells us what share of gold stocks are trading in a bullish pattern.

I said that when this index reaches above 70, it’s overbought and when it’s below 30 it’s oversold.

A few weeks back it was over 90. Today it’ still near 80, which suggests overbought conditions persist. Translation: gold stocks are still looking pricey from a sentiment perspective.

And yet gold remains near record highs while the stocks aren’t following. So what gives?

Well, here are a few possibilities.

We know that central banks remain consistently big buyers. We also know that especially European and Asian buyers have been adding to their gold ETF holdings. But there’s more to it than that.

Data from the Atlantic Council’s Dollar Dominance Monitor shows that the share of USD in global central bank reserves continues to fall. In 2002, it stood at 72% of global reserves.

Since then, it has fallen 14% to just 58%. Researchers at the Atlantic Council said, “…in recent years, and especially since Russia’s invasion of Ukraine and the Group of Seven (G7)’s subsequent escalation in the use of financial sanctions, some countries have been signaling their intention to diversify away from dollars.”

I believe this is why, at least on a near-term basis, you can have gold remain strong while gold miners go the other way, at least temporarily.

At the same time, investors are faced with near microscopic yields on their savings accounts, while the Fed Funds rate is at multi-year highs. That’s great for banks, but not so much for savers.

Now, imagine what will happen to savings yields when the Fed (potentially soon) starts cutting rates? It doesn’t take a genius to figure out that falling yields are precious metals’ best friends as the opportunity cost starts to shrink.

Gold’s been holding up well, despite recent volatility.

Here’s some research my business partner, Jeff Clark, recently published on the latest correction in gold: Is the Big Correction Over? Here's How to Play It

It’s an excellent take on what’s been driving gold and how it behaved in its last bull market from 2001 – 2011.

As you probably guessed though, it’s not just gold that’s benefiting.

Silver’s monetary characteristics will surely help drive it higher too. But silver's industrial drivers don’t seem to be taking any breaks either.

China’s silver buying and silver consumption appear to be relentless.

The Shanghai Futures Exchange silver inventories have fallen nearly 75% since peaking in early 2021. Despite a recent smallish increase in late June, there was a considerable draw-down in the first week of August. That’s when some 30 million oz left the exchange’s vaults.

And that still hasn’t been enough for Chinese investors and industrial consumers.

Have a close look at this chart from my friend Tavi Cost over at Crescat Capital.

It shows that the latest fourth-month period saw record levels of silver imports to China. Clearly, China wants and needs a lot of silver. My sense is that this is driven mostly by silver’s attractiveness as a safe haven, as well as China’s breakneck pace of solar panel production.

Either way, the future of silver looks bright.

We have a new pick in my recent issue. It’s a silver explorer with a maiden resource that’s considered one of the world’s highest grade primary silver deposits. And I don’t think they’re anywhere near done growing, as recent drilling has produced very high-grade intercepts kilometers from the current resource.

Silver continues to consolidate around the $29 level. Given my review of and outlook for the Gold Miners Bullish Percent Index, I remain cautious about the risk of another drawdown in the precious metals equities before finally kicking off a new leg higher.

That said, there are great bargains to be had right now. Many of the companies in the Silver Stock Investor portfolio look ripe to be bought, at least in increments, at current levels.

I think there’s still going to be considerable volatility in the near term. But you must decide for yourself whether to take advantage of it or not. I will do my best for subscribers to navigate and benefit from silver’s volatility.