Silver Price 2023 Outlook: Will Silver Underperform Gold in 2023?
Updated
At the time of writing, silver is set to close 2022 with minor gains and perhaps more surprisingly, actually outperform gold, albeit after a much more turbulent year. Two factors behind silver’s underwhelming performance this year were the US dollar's strength and higher bond yields, which stemmed from aggressive policy tightening by central banks globally to quell inflation. As we look ahead towards next year and for the most part, central bank policy, in particular, the Federal Reserve’s policy will be the key driver for silver.
Silver and Gold YTD Performance
Silver/Gold YTD Performance - Photo: Capital.com. Source: TradingviewFederal Reserve Pivot In Focus
The questions being asked for the beginning of 2023 will be at what point the Federal Reserve officially pivots. While some would argue they have pivoted following the slowdown in the pace of rate hikes, I would disagree as they are still raising interest rates. In the December dot plot projection, the median view among the Fed is that rates will be 5.1% by the end of 2023. This is in contrast to money market pricing where the peak rate is seen being reached in Q1 2023 at 4.75-5%, before falling back down to 4.25-4.5% by the end of the year. The issue here for markets is if the Fed follows the path of its dot plots equity markets are at risk of a hawkish repricing, keep in mind inflation is still elevated and the Fed are unlikely to back down until they are convinced inflation will come close to its target. As such, should we see a hawkish repricing, this will likely apply pressure on silver prices in the near-term.
Another point to add that will likely make silver more vulnerable to a hawkish repricing is positioning. As it stands, investors are the most bullish on silver since Q2 2022 and more importantly, no longer hold a sizeable net short. While a softer USD and falling bond yields aided the move higher in silver at the back end of 2022, the move had likely been exacerbated by an unwind of short positioning.
Silver Short Squeeze
Silver Positioning - Photo: Capital.com. Source: TradingviewLower Bond Yields Can Underpin
As yield curves remain deeply inverted, the signals are clear that a recession will occur, the difficulty is knowing when. That being said, should we see inflation continue to drift lower and economic activity deteriorate, this will likely place pressure on bond yields as growth concerns begin to dominate and thus falling yields reduce the opportunity cost of holding non-yielding assets such as gold and silver, which in turn will likely underpin precious metals. That being said, a hard landing would reduce the appeal of silver over gold. Keep in mind, during recessions, gold has often outperformed silver given that gold is often seen as a safe haven.
Nonetheless, there is a strong case for lower bond yields in 2023. Firstly, the benchmark 10yr is on course for back-to-back negative returns for the first time since 1959, there has never been three consecutive years of losses, looking back to 1928. At the same time, the 10yr bond is looking at one of the worst yearly returns in its history. As such, now that central banks are beginning to shift towards a less aggressive stance and with inflation heading in the right direction, the reasons to be aggressively bearish have receded. That in itself should at least provide some comfort for the bond market.
Gold/Silver Ratio During US Recessions
Gold/Silver Ratio - Photo: Capital.com. Source: TradingviewSilver Technical Outlook
The late Q4 rally looks to be running out of steam and with RSI showing a bearish divergence, this provides an example of topside exhaustion. As such, should we see US data that pushes back on current market pricing of mid-year Fed cuts, silver prices are at risk of a corrective move lower towards the November highs of $22.20-$22.25, below there, key support is situated at the 200DMA ($21.12). Another warning sign that the risk is lower in the very near term is the rise in bond yields with the US 10yr at 3.8% and thus it is hard to be bullish in the precious metal in the short run. Taking a longer-term view, I am much more bullish on gold than silver particularly with the rising risk of a recession, alongside this, with inflation heading lower, yields should be lower throughout 2023, providing support for gold and silver. However, with my view that economic activity will deteriorate, gold should outperform silver in the new year.
Silver Price Chart Daily Time Frame
Silver Price Chart - Photo: Capital.com. Source: TradingviewRelated topics
