Silver prices continue to be resilient in the midst of stock market volatility. While silver prices are up roughly 13% year-to-date, seriously outpacing the broader markets, it has a lot more room to grow in 2016. That’s because of weak global indicators and the fact that central banks have run out of monetary tricks to support the economy. Then there is the untested tool of negative interest rates.
Investors Paying Attention to Silver
Last year, silver registered its record fourth consecutive loss in a row. While silver has many industrial uses, it is also a hedge against economic uncertainty. And with the stock market at record-highs, investors were turning their back on precious metals like silver and gold in droves.
But all that changed in 2016. Silver prices are up around 13% since the beginning of the year as risk-averse investors look to protect their wealth. The S&P 500, on the other hand, has lost around two percent of its value.
And while the index has rebounded over the last couple weeks, silver prices have largely remained resilient. In fact, silver prices have advanced around five percent since the beginning of March.
Why the renewed interest in silver? The Federal Reserve may have raised its key lending rate for the first time in a decade back in December, amidst signs of a strengthening U.S. economy, but that may have been a little premature.
Since then, the Federal Reserve has been more than a little cautious about its outlook for the U.S. economy. Fourth-quarter gross domestic product (GDP) growth of one percent, while stronger than expected, is still pretty weak. (Source: “National Income and Product Accounts Gross Domestic Product: Fourth Quarter and Annual 2015 (Second Estimate),” Bureau of Economic Analysis, February 26, 2016.) That’s especially true when you consider the U.S. is the world’s biggest economy and the Federal Reserve printed off $3.5 trillion to kick-start it through its quantitative easing policy. One could hardly say the Federal Reserve has its finger on the pulse of the U.S. economy.
On top of that, weak fourth-quarter results and economic downgrades from the World Bank, International Monetary Fund (IMF), and the Organisation for Economic Co-Operation and Development (OECD) are weighing on investor sentiment. So, too, is abysmal growth from China, Japan, and the eurozone.
Global Debt Will Lift Silver Prices in 2016
Thanks to misguided central banks from around the world, silver is looking even better. Not only is the global economy a mess, but also central banks are at a loss when it comes to rectifying the situation.
Even the central bank of all central banks is warning of further pain. The Bank of International Settlements (BIS), known as “the central bank of central banks,” says a financial storm has been gathering for a long time. And both governments and central banks are running out of policy options. (Source: “Uneasy calm gives way to turbulence,” Bank for International Settlements, March 6, 2016.)
In fact, negative interest rates, which have been adopted by Japan, Denmark, Sweden, Switzerland, and the European Central Bank (ECB), are not working. What do central banks do when their current strategies aren’t working? They make deeper cuts. The European Central Bank meets on March 10 and it’s widely believed that the bank will cut its negative interest rates even further—pushing it down to -0.4%.
But do negative interest rates even work? If you’re looking for a short-term, one-day knee-jerk reaction from the markets, then sure, negative rates work. But do negative rates lead to increased borrowing from the business community and individuals? Not yet.
In the face of a weakening global economy, what else can central banks do? Hopefully not much. Years and years of cheap credit has led to risky borrowing and lending—and ultimately, more debt.
According to the BIS, total debt from households, non-financial corporations, and governments since the end of 2007 has soared more than 22%, up from $110 trillion to more than $135 trillion. Over that same period, total debt from these sources of borrowing has jumped to more than 200% of GDP.
And debt, if you’ll recall, was one of the causes of the financial crisis in 2008. The solution, an eight-year experiment, has come full circle.
Weak global economic indicators and the rudderless path central banks are taking will continue to breed uncertainty and fear, making silver and other precious metals more attractive. Silver has been on a tear in 2016, but it’s just the beginning.