At the time of writing, silver is expected to end 2022 with slight gains and, perhaps more shockingly, to outperform gold after a far more volatile year.
Silver’s lackluster performance this year was caused by two factors: the strength of the US dollar and higher bond yields, both of which resulted from vigorous policy tightening by central banks throughout the world to combat inflation.
Looking ahead to next year, central bank policy, particularly the Federal Reserve’s policies, will be the primary driver for silver.
The Federal Reserve’s Turning Point
The question for the beginning of 2023 will be when the Federal Reserve officially pivots.
While others argue that they have shifted their stance in response to the slowing pace of rate hikes, I disagree because they are still rising interest rates.
According to the December dot plot prediction, the Fed’s median view is that rates will be 5.1% by the end of 2023. In comparison, the peak rate for money market pricing is expected to be 4.75-5% in Q1 2023, before decreasing back to 4.25-4.5% by the end of the year.
The concern for markets here is that if the Fed follows the route of its dot plots, equities markets are at risk of a hawkish repricing; nevertheless, inflation remains elevated, and the Fed is unlikely to back down until it is certain inflation will come near to its target.
As a result, if we see a hawkish repricing, silver prices would likely suffer in the short term.
Positioning is another factor that will likely make silver more vulnerable to hawkish repricing. Investors are currently the most positive on silver since Q2 2022, and, more significantly, no longer have a sizable net short position.
While a weaker USD and decreasing bond yields boosted silver’s rise toward the end of 2022, the move was likely accentuated by an unwinding of short positions.
Lower Bond Yields Can Support
As long as yield curves remain deeply inverted, the signals are obvious that a recession will emerge; the challenge is determining when.
However, if inflation continues to decline and economic activity deteriorates, bond yields will likely face pressure as growth concerns take center stage. Falling yields cut the opportunity cost of keeping non-yielding assets such as gold and silver, which will likely support precious metals.
However, a harsh landing would lessen silver’s attraction over gold. Remember that gold has often outperformed silver during recessions because gold is considered a safe haven.
Nonetheless, the case for lower bond yields in 2023 is compelling. To begin, the benchmark 10yr is on track for back-to-back negative returns for the first time since 1959; three consecutive years of losses have never occurred since 1928. At the same time, the 10-year bond is set to have one of its poorest yearly returns in history.
As a result, now that central banks are beginning to adopt a less aggressive position, and inflation is trending upward, the grounds to be strongly pessimistic have faded. That should at least bring some solace to the bond market.
Technical Outlook for Silver
The late-quarter rise appears to be running out of steam, and the RSI is displaying a bearish divergence, indicating topside exhaustion.
As a result, if we have US data that contradicts current market pricing of mid-year Fed cuts, silver prices could retrace lower towards the November highs of $22.20-$22.25; below that, crucial support is located around the 200DMA ($21.12).
Another warning indicator that the danger is lower in the near term is the rise in bond yields, with the US 10-year yield reaching 3.8%, making it difficult to be positive on gold in the short run.
In the long run, I am considerably more bullish on gold than silver, especially with the increased danger of a recession.
Additionally, with inflation expected to fall, rates should fall into 2023, giving support for gold and silver.
However, given my belief that economic activity will decline in the coming year, gold should beat silver in the new year.
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