Silver: Easier Real Yields Meet a Modest Industrial Recovery

Silver kicks off the week with a couple of different fundamental influences. Real yields eased into Friday, while the latest verified U.S. manufacturing data shows improvement that remains modest over several months. Together, they offer a bit of a framework for assessing the metal’s monetary and industrial roles, which, of course, we have to pay close attention to.

10-year Real Yield

The Treasury’s 10-year real yield declined from 2.37% to 2.25%. Lower real yields can reduce the opportunity cost of holding precious metals. For silver, the monetary support needs to be considered alongside the outlook for industrial activity as well.

The industrial evidence is from October 16 and covers September. The Federal Reserve reported manufacturing output increasing 0.3% after a 0.2% decline in August. Its seasonally adjusted manufacturing index was 98.4 in September, against 98.1 in April, with 2017 equaling 100. September was preliminary, and the preceding months were revised. This supports a restrained interpretation of manufacturing recovering from August’s decline, but the six-month chart does not show a broad acceleration of exceptional magnitude.

An aggregate production index is a proxy for the industrial environment. It does not necessarily measure silver itself, so we have to be somewhat cautious in taking this as a measurement.

The Wider Economy Provides Some Additional Context

The wider economy provides some additional context, though, with the BEA’s October 29 advance estimate putting third-quarter real GDP growth at a 3.4% annualized rate. Real final sales to private domestic purchasers increased 4.9%, compared with 4.6% in the second quarter. These figures suggest resilient private activity, but they are broad aggregates rather than direct measures.

Resilience cuts both ways for this market, as it can support the industrial demand outlook while making rapid monetary easing a little less compelling for the Federal Reserve. Silver could therefore receive better growth news without automatically receiving a more favorable interest-rate outlook.

Inflation Remains an Issue

The inflation constraint remains visible, as September core PCE inflation was 3.1% year-over-year, according to the BEA’s October 29 publication. The Federal Reserve held its policy rate range at 3.75% to 4% on October 28. Neither establishes what the next decision will end up being. Persistently restrictive financing conditions could matter both for investment and industrial carrying inventories.

Moderation in Employment Cost

The Employment Cost Index on Friday supplied some moderation. Civilian compensation rose 0.8% in the third quarter, down from 0.9% in the second. For silver, the useful question would be whether easing cost pressure can coexist with output growth. A combination of this would offer a more balanced fundamental backdrop than either renewed inflation pressure or sharp deterioration in manufacturing demand.

More Information Incoming This Week

The next tests will be September job openings on Tuesday at 10 a.m. Eastern Standard Time, preliminary third-quarter productivity and costs on Thursday at 8:30 a.m., and October employment on Friday at 8:30 a.m. The stronger scenario requires both a manageable financing backdrop and evidence that industrial activity is holding up. Falling real yields accompanied by collapsing demand would be less reassuring than real yields falling alongside stable production.

Technical Outlook

The technical analysis for this market looks rather miserable, despite the fact that the market has rallied a bit during the early part of the Monday session. We have bounced from the crucial $50 level, which goes back multiple decades as both support and resistance. The $50 level has a lot of psychology attached to it as well, so pay attention to that, because a breakdown below the $50 level could sour the mood. At this point, though, any rally I would look at with suspicion until we can clear the $55 level.