What a difference three months can make. Currently trading near $15.00 an ounce, silver prices are up almost nine percent since the beginning of the year and at their highest levels since November. While silver bulls may see the current surge in silver prices as a great time to sell, the fact is that silver could surge significantly higher.
Silver Prices Surge on Weak Stock Market
Silver prices have been bullish in 2016, up nine percent since the beginning of the year and at its highest levels in three months. Silver prices are getting a boost from an unstable stock market, global economic slowdown, and a slumping U.S. dollar.
These are not the kinds of issues that are going to be solved overnight. As a result, silver prices have a lot more room to run. If investors see precious metals like silver and gold as a hedge against economic uncertainty, then now is the time to consider silver.
First, the stock market is off to one of the worst starts ever. The S&P 500 is down 7.5% since the beginning of 2016, the Dow Jones Industrial Average has fallen almost seven percent, the New York Stock Exchange has lost six percent of its value, and the tech-heavy NASDAQ has tumbled 6.7%.
And the future does not look bright for the stock market. Fourth-quarter earnings are trickling in and it isn’t pretty. The blended fourth-quarter earnings decline for the S&P 500 is now -5.8%. If this is the final tally, it will represent the first time the index has experienced three consecutive quarters of year-over-year declines in earnings since the first quarter of 2009 through the third quarter of 2009. (Source: “Factset Earnings Insight,” FactSet, January 29, 2016.)
The blended revenue decline for the fourth quarter of 2015 is now -3.5%. If this is the final number for the fourth quarter, it will be the first time the index has seen four consecutive quarters of year-over-year revenue declines since the fourth quarter of 2008 through the third quarter of 2009.
Silver Prices Supported by Weak U.S. and Global Economies
The weak fourth-quarter results shouldn’t be a total surprise. The U.S. economy is not doing as well as Capitol Hill wants you to think. Fourth-quarter gross domestic product (GDP) was an abysmal 0.7%. That’s a significant slowdown from the two percent growth reported in the third quarter and 3.9% growth in the second quarter. (Source: “Gross Domestic Product: Fourth Quarter and Annual 2015 (Advance Estimate),” Bureau of Economic Analysis, January 29, 2016.)
Further, the U.S. jobs market is starting to falter. The U.S. economy added just 151,000 jobs in January, a sharp deceleration from previous months. To put that into perspective, that works out to just 3,020 jobs per state. (Source: “Unemployment Situation Summary,” Bureau of Labor Statistics, February 5, 2016.)
While January’s jobs data do not point to an economic implosion, they do show that the U.S. economy is slowing down. They also show that the U.S. economy is not immune to a global economic slowdown. And it is slowing down.
This year and next, the U.S. economy is projected to advance 2.6%. That’s pretty slow for the world’s biggest economy and especially one that has been the recipient of $3.5 trillion in financial aid from the Federal Reserve’s quantitative easing (QE) strategy. (Source: “Subdued Demand, Diminished Prospects,” International Monetary Fund, January 19, 2016.)
Globally, in 2016, the economy is expected to climb 2.7%, slow down to 2.4% in 2017, and grind down to 2.2% in 2018. (Source: “Global Economic Prospects,” World Bank, January 6, 2016.)
Silver Prices Gain Ground from Fed and Weakening U.S. Dollar
The U.S. dollar has been sinking on the heels of slightly improving oil prices and fears over the strength of the U.S. economy. The U.S. dollar is down the most in seven years against a basket of other major currencies, -2.6% since the beginning of February, and down three percent since the beginning of December.
Silver prices are poised to also gain ground on the back of the Federal Reserve’s interest rate hikes. Or lack thereof. The Fed, believing the U.S. economy was strong enough to stand on its own, raised its key rate in December—the first such hike in nearly a decade.
But future hikes in 2016 are now in jeopardy, thanks to a volatile stock market, weak earnings, underwhelming global economic growth, a lethargic U.S. dollar, and less-than-stellar jobs data and GDP numbers.
Silver bulls might look at the current silver rally as a selling opportunity, but I think there are more than enough long-term catalysts out there to send silver prices higher.