Forex Trading Library

Will Silver Beat Gold?

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A recent survey conducted by Reuters showed economists and analysts predicting gold prices would average below the $2,000/oz mark this year and would be even lower next year. On the other hand, they predicted silver prices to average $23.52/oz this year but move up to an average of $25.00/oz next year.

There is a large caveat, though. Those economists generally agree that there won’t be a recession this year. The economy is expected to slow a bit, which would weigh on disposable income, and hurt the price of gold. But the comparably cheaper silver could keep growing, and get a boost as the economy starts to gather steam again next year. But are they right about avoiding a recession?

The recession that never happened

At the start of the year, there was a solid consensus that there would be a recession this year. The US in particular was expected to be affected by an economic “hurricane” in the words of JPMorgan CEO Jamie Dimon. He has since turned a lot more optimistic, not talking about a recession. The number of economists predicting a recession has gone from an overwhelming majority to just about 50% in recent weeks. And it keeps falling.

Some surveys now show a majority of economists expecting a recession to be avoided. One of the key indicators cited for a pending recession was the yield curve inversion. That has correctly predicted 9 out of 9 of the last recessions. Yet, as the Fed looks to be winding down its rate hiking cycle, the yield curve inversion is starting to shrink.

It’s the surprise that matters

Here’s the thing: It’s very rare for a recession to not be a surprise. In most cases, the consensus among the leading experts, such as the Fed, Treasury, captains of business, is that a recession isn’t imminent. Then the recession happens. Covid was a surprise. Few people saw the sub-prime crisis approaching (even though after the fact they might have said otherwise). The dot-com bubble was only seen as a bubble until after it burst. The Asian crisis came entirely out of the blue. And so on.

And here’s the other thing: The yield curve inversion tends to diminish before the recession strikes. This is because the curve tends to flatten as rates are rising. When the Fed holds rates steady, then the curve steepens. And usually, the Fed stops hiking a few months before the recession happens. Sometimes the Fed even cuts rates before the markets crash, signaling the start of a recession.

So, what about gold?

Gold tends to gain in popularity and the price rises when people are worried about the economic outlook. The Fed hiking was seen putting pressure on the economy, potentially tipping it into recession. With few rate hikes on the horizon, those fears could be receding, and the price of gold falling back. But they could come back suddenly if the Fed is forced to cut rates because of a liquidity crisis in the markets that typically precedes a recession.

If no recession happens, then the relatively high interest rates will make treasuries more attractive than gold, pushing down its price. But the price of silver could keep climbing as the demand for solar panels and other renewables that use silver keep increasing in the future. That means if the yield curve inversion is wrong for the first time since it was developed as a theory, then silver could be a better bet than gold in the coming months.

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