What Caused the Price of Silver to Fall?
It seemed like silver had found an easy route toward the $18.00-per-ounce, or even $20.00-per-ounce, mark. Instead, its latest price has fallen to a range between $16.17 and $16.52 per ounce. Silver is following gold, which has also given up some of the gains it made since the start of 2018. So what has caused the price of silver to fall?
When discussing prices in a speculative context, such as precious metals or equities, nothing is certain. Still, the overall market is sending a rare signal of clarity. The Dow Jones index has given up about 12%. That means the stock market is in full correction mode.
That would normally imply silver (and gold) moving higher. The key is the “normally” part, because there’s nothing normal about the market now. Much of the 2017 and January 2018 bull fever was driven by the federal tax cuts.
Why the Silver Price is Going Down
At first, stocks rose on the expectations of tax cuts. Since late December 19, when Congress signed the reform into law, they rose on expectations of higher corporate earnings. It was a veritable orgy of optimism. Some companies announced employee bonuses, while others announced bigger investments, and investors responded in kind.
The tax cuts were to stocks what an afterburner is to a jet engine. Yet those very tax cuts are the very reason that stocks and precious metals are now dropping. Many analysts and investors expect the Federal Reserve to lift interest rates at a faster and more significant pace than anyone expected to counter inflation.
Ironically, the January jobs report, with the 200,000 jobs that the economy added, is the trigger for inflation. In fact, the Fed has been muted on the topic, making no mention of lifting interest rates. However, it has not intervened to dismiss interest-rate fears, adding more fuel to the fire.
The higher interest rates will likely increase the U.S. dollar’s value compared to other major currencies (the dollar index). And typically, a rising dollar weakens silver and other precious metals. Will the silver price continue to fall? In fact, the better question might be: “Is it a good time to buy silver?”
Is Now a Good Time to Buy Silver?
It’s probably a great time to buy silver. Investors have ignored silver without reason. The low interest rates of the past 10 years, near zero for most of that time, have encouraged risky and aggressive behavior. The Fed rigged the game in favor of equities rather than gold or silver. Now that inflation is knocking at the door and interest rates are supposed to go higher, silver and gold should win back many investors, looking for a safe haven for their cash.
If the silver prices have not yet responded to the change of investment climate, it’s because of something we might describe as, for lack of a better term, confusion. The market is falling, yet for all intents and purposes, the economy—on paper—faces its most favorable prospects in years. There was no subprime crisis prompting the market’s collapse in the week ending February 9.
In addition, there’s an intruder in the market, and it’s called cryptocurrencies. These have risen and fallen dramatically in a matter of a few months. For a while, it seemed that the most popular of all cryptocurrencies, Bitcoin, was slated to take over gold as the sanctuary to reach in the event of an equity sell-off.
That idea came to a swift conclusion when Bitcoin collapsed, giving up 50% of its 2017 gains in a matter of days. However, there are still those clinging to the hope that it will recover. Many even bought their bitcoins using their credit cards. As you can imagine, they’re holding on, and others are probably unable to sell.
Then there are others, such as Ariel Roubini, the New York University (NYU) professor who was one of the first to warn about the subprime crash in 2007–2008, who expects Bitcoin to fall back to zero. (Source: “Roubini Says Bitcoin Is the ‘Biggest Bubble in Human History’,” Bloomberg, February 2, 2018.)
Simply put, the smart money is not in bitcoins. There’s no smarter money than the Ontario Teacher’s Pension Fund. They’re world-famous for the discipline and comprehensive research that goes into every stock they pick. As it happens, the fund has no bitcoins. (Source: “‘There’s a lot of drug money’: Why Teachers’ won’t touch Bitcoin,” BNN, November 10, 2017.)
Therefore, the usual volatility indicators and investors’ responses have been distorted by an interference in the system.
The facts, however, are clearer: inflation will make its long-awaited return to the economic discourse in 2018. Many have forgotten what it is, and some analysts on Wall Street—those who started their careers in 2008—have never experienced it in their professional lives. This will influence the way silver and other metals respond. As the financial picture becomes more clear, silver stands to make big gains this year.