Silver has to deal with a substantial producer price increase on Thursday, as the BLS reported that September final-demand PPI rose 1.3% month-on-month, seasonally adjusted, and 6.3% from a year earlier, unadjusted. The measure excluding food, energy, and trade services increased 0.5% monthly.
The composition matters as much as the headline for the silver market, as final-demand energy prices rose 10.8% monthly, compared with 2.6% for goods overall and 0.8% for services. Goods excluding food and energy increased 0.3%. These categories overlap, so their percentage changes are not necessarily an additive contribution to the headline index.
Mixed Industrial Signal
The report creates a mixed industrial signal. Higher selling prices can reflect pressure on purchasing power, as traders have to determine whether or not there is a volume increase in goods being produced or if it is just simple component pricing. The monetary channel can be more immediate. Persistent inflation could make policymakers less comfortable with easing and could sustain future financing costs, which are somewhat elevated.
For a non-yielding investment position in something like silver, competing returns can be a headwind. For an industrial user, financing and input expenses can affect inventory decisions. These are economic mechanisms, not verified explanations for a particular silver price movement today, but something worth watching.
Distinction Between Prices and Quantities Is Especially Useful Here
The Federal Reserve’s latest completed decision was its September 16 increase in the federal funds target range to 3.75% to 4%. Its statement emphasized elevated inflation. Today’s PPI may add more information relative to that policy debate, but it does not necessarily change the policy rate itself.
The latest official daily Treasury observations also precede the release. The 2-year nominal par yield was 4.82% yesterday, compared with 4.79% the day before. Meanwhile, the 10-year real yield declined to 2.84% from 2.88%. These movements show why silver’s financing backdrop should not be reduced to a simple blanket statement that all yields are rising.
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See all Silver forecastsYesterday’s CPI
Yesterday’s consumer price report adds some context as well. Headline CPI rose 0.6% monthly, seasonally adjusted, and 3.7% annually, unadjusted. Alongside today’s producer data, it keeps inflation relevant to the monetary discussion. Neither index directly measures purchases of silver, and their different coverage prevents a mechanical comparison of headline news.
That being said, this is a market that will continue to be somewhat based around competing focuses, with industrial activity highlighted by the Federal Reserve production report from September 18 covering August. It says manufacturing output declined 0.3%, while total industrial production was unchanged. The manufacturing index was 98.2 against July’s 98.4, with 2007 equal to 100 as a measuring guide.
A manufacturer facing higher costs has to reduce production, maintain output, or pass costs to consumers. Each outcome has different implications for silver use. Without newer activity data, the PPI acceleration alone cannot resolve whether industrial demand is absorbing pressures.
Silver’s electrical and electronic applications provide a reason to watch manufacturing, as documented by the U.S. Geological Survey. However, aggregate U.S. output is only a broad indicator. It cannot establish demand across each end use, and it does not capture the entire global silver market.
Tomorrow’s industrial production release, scheduled at 9:15 a.m. Eastern, is an important next test. Firmer activity alongside stable financing conditions would support a more constructive interpretation. Weaker production combined with rising real yields would create an even more difficult combination for the industrial case of silver.
Technical outlook
The silver market finds itself testing the crucial $55 level and is seeing some relief. I suspect that the market is trying to find its footing, and short-term opportunities ot the upside could continue. However, I also see this as a short-lived scenario as the fundamentals continue to sour.
