Fed Speak and It’s Possible Affect on Silver

Sean Brazney: Hello! My name is Sean Brazney, Sales Director for Monex Deposit Company. We are here today and have the pleasure to be with Jeffrey Christian, Founding Member and one of the many analysts over there at CPM Group. Thank you for being with us today, Jeffrey.

Jeffrey Christian: It’s always a pleasure. I hope everything’s good with you Sean.

Sean Brazney: It’s kind of a double topic today and one being really a lot of the speculation that I’ve been hearing in the market place about the Fed. It really kind of came into pre-Feb, the February Fed meeting, there was really heavy speculation that the Fed might pause or capitulate, new word in the market now is Skip. I didn’t really see the info, data, or analysis to really support that and it seems like it continues to happen even though the data points to a Fed tightening.

The other half of this is really your report that you put out in the beginning of the year that dealt with silver in a median range of $24.40 or range, you expected it to stay around a median price of $24.40, which again your crystal ball has been spot on. I think that is pretty much right about the average for the year so far. So, starting with the first part of that, on the Fed speculation and the market coming into a Fed next week. I’m wondering if you can share some information about what you think might play out and how that may still be going for the rest of the year.

Jeffrey Christian: Well, two parts, first is what do we think and what does the Fed say. The Fed saying that they’re leaning towards another 25-basis point increase, the economy has been stronger than they and a lot of other people thought. Inflation is slowly declining, but it’s still high. The Fed has been saying, we’re watching these things very closely, because as we said at the beginning of the year, this is going to be a year of economic transition. Our view is that there’s something more, slightly more, than a 50% chance that the Fed raises interest rates another 25 basis points in June, next week, and then pauses. That’s sort of what the Fed… no that is what the Fed has been saying. So, I think that one of the problems that market participants have had in the first half of the year is they didn’t want to believe what the Fed was saying and the Fed has said repeatedly that this is what we’re going to do and then they’ve done it. The market has been surprised that the Fed has done what it said it would do. I think right now this month what you’re finding is the market sort of wrestling with this dichotomy between what they want to believe and what they want to hear and what is most likely to hear. Our expectation is the Fed probably does raise rates next week, but it’s slightly more than a 50% chance, because there are pockets of weakness that are showing up and developing further within the economy, but basically the economy has been stronger, employment has been stronger, inflation has been higher than the Fed would like to see, so they’re probably going to do another 25 BPS. We do think that they pause then and wait and that this may well prove to be the end of the interest rate increase cycle that we might see the Fed pause and keep rates around where they will be, 5.25% or so for the rest of the year and maybe even into 2024, but at some point, we do think that the economy weakens. You’re starting to see some cooling of consumer demand. You’re seeing a reduction in business investment. You’re starting to see supply constraints and there are political issues that factor into all of that. So, at some point, but it may well be 2024, the economy will start weakening, and at that point we think the Fed might lower rates. So, that’s the first part.

The second part is the market just continually doesn’t want to believe that and its sort of wishful thinking. Yeah, the Feds got a lower rate, because we need a lower rate. Well, the Fed, despite what some pundits say on the internet, the Fed doesn’t… the Fed policy isn’t there to support the stock market or the bond market. The Fed policy is there to try to maximize employment while keeping inflation down. So, that’s what the Fed is going to do, and that’s why the Feds going to do it, and the market ought to pay attention to the financial and monetary reality.

Sean Brazney: Coming to my second part of that, was silver and that $24.40 average price range has really benefitted quite a few of the investors that are willing to take profits on the rallies when we see it get up there near $25-$26 silver, and on the flip-side of that, when it comes down $24.40’s or lower, they seem to be willing to accumulate again on the dips. Is this something that you think will also happen or continue to happen throughout the rest of the year?

Jeffrey Christian: Yes! It’s funny, because the price right now as we’re speaking is $24.37. Kind of weird and maybe a little bit uncanny, but our expectation is that the price continues to trade. We’re looking at a low $22.50 this year. It is possible that it goes lower and we’re looking at a high $26, $27, which we’ve already seen this year. So, our expectation is that the silver price might come off in the next two or three months and you might see investors come back into the market as more significant buyers. In fact, if you look at some of the factors that we looked at in May, investment demand was picking up in May. You saw fewer investors willing to short silver, and you also saw increased demand for silver coins, and increased demand for silver ETFs, and other silver bullion products. Our expectation is over the next three months or so, you might see a little bit of weakness in the silver price, not a lot, not like what we saw last year and, in that environment, investors may come in and buy a significant amount of silver. Significant being $10, $20, $30 million ounces of silver over the next three or four months, which would then be enough to start the price of silver rising once we get into the fourth quarter. At the same time, we do think that you’ll see investment demand for gold rising and you’ll see those economic and political factors in the fourth quarter starting to weaken and worsen in a way that will stimulate further investment demand. So, we’re sticking by the $24.40 average price for this year with significantly higher prices for silver next year.

Sean Brazney: You’ll want to kind of add gold in just briefly with it, Jeffrey, because it seems like gold investment demand has stayed significantly high, at least from what I’ve been able to see. Are you seeing that on your end too?

Jeffrey Christian: We are seeing that. Investment demand has been pretty good. I think it’s probably running around at $27, $28 million-ounce annual rate right now for physical silver on a global basis. It’s funny, because people, some people will talk about weak gold prices. Gold prices hit an inter-day record high of $2,085 May 4th. That’s a month ago. The price has been really trading, let’s say between $1,980 and $2,000 for the last couple weeks. There’s a lot of investment demand at these levels with people thinking gold prices can break above $2,000, and it can definitely break above $2,000, and make another run significantly higher. Again, we’re moving into a period of seasonal weakness and fabrication demand from jewelers and electronic manufacturers, seasonal weakness from investment demand, you’ve got the debt crisis that the government created has been solved by the government that created it at least for now. You’ve got some things that have gotten out of the way that were tailwinds for gold and we do think that the gold price could soften a little bit over the course of June and July and maybe August, but then we do think it strengthens, because there are other economic issues that haven’t been resolved, they’ve been just kicked down the road and they’ll come back to haunt us with increased force starting in August and September.

Sean Brazney: A lot of amazing information from you today, Jeffrey. Thank you. Of course, we’re here to support our report that you do for us, 2023 Precious Metals in the Eye of the Storm. Investors and our viewers can call and talk to an account representative to get that report for free. Also, to remind our viewers of a new report that you’ll be putting out here pretty soon. So, stay tuned with us on the next recording and we’ll hopefully have a chance to make mention of that as well. Thank you for your time, Jeffrey!