In the latest episode of the Money Metals Midweek Memo, host Mike Maharrey dives deep into pattern recognition and its crucial role in both ice hockey and investing.
Drawing fascinating parallels between the two, Maharrey highlights how goalies rely on pattern recognition to make split-second decisions, a technique that can also be applied to the financial world.
While hockey goalies anticipate puck movements based on player behavior, investors can anticipate market shifts by recognizing patterns in financial data.
CPI Data and Inflation: Decoding the Signals
Maharrey's analysis begins with the latest Consumer Price Index (CPI) data, which showed a monthly increase of 0.2% and an annual inflation rate of 2.5%.
While this headline figure suggests inflation is cooling, core CPI—excluding volatile food and energy prices—rose 0.3%, bringing annual core inflation to 3.2%. This higher-than-expected core inflation raises questions about whether the Federal Reserve will move forward with aggressive interest rate cuts.
The market reacted predictably: gold dipped by $7, and silver saw minor movement. Maharrey emphasizes the importance of taking government inflation figures with a grain of salt, noting that the CPI formula was changed in the 1990s to understate price inflation. Using the 1970s CPI formula, real inflation would likely be double the official numbers.
The Case for a September Rate Cut
Maharrey predicts that the Federal Reserve will cut rates during its September meeting due to the economy’s growing dependence on easy money.
He points out that while current interest rates are near historical norms, the modern economy—burdened with massive debt—is unable to function under these higher rates.
While many expect a "soft landing" for the economy, Maharrey is skeptical, citing historical patterns that suggest a bust often follows an easy money-fueled boom.
Silver’s Underperformance: The Calm Before the Storm?
Despite gold’s impressive performance this year—hitting $2,500 per ounce—silver has lagged behind. While silver has gained roughly 20%, its price remains far below its all-time high of nearly $50 an ounce, last reached in 2011. The current price of silver hovers between $28 and $30, leaving many to wonder why silver isn’t keeping pace with gold.
One important factor is the gold-silver ratio, which stands at around 88:1. Historically, this ratio has averaged between 40:1 and 60:1.
The current wide ratio suggests that silver is significantly undervalued compared to gold, leaving room for potential price corrections.
Silver’s Role as Both a Commodity and a Monetary Metal
Maharrey explains that silver’s dual role as both an industrial commodity and a monetary metal complicates its price movements.
Over 50% of silver demand comes from industrial uses, particularly in the rapidly expanding green energy sector. This demand is expected to continue growing, with silver playing a crucial role in solar panels, electric vehicles, and electronics.
At the same time, silver’s role as a monetary metal—used as currency for thousands of years—means its price often follows gold during bull markets. Historically, silver has outperformed gold during the latter stages of precious metals bull runs, providing an opportunity for significant upside.
A Bullish Pattern for Silver
One of the most exciting developments in the silver market is the emergence of a long-term "cup and handle" pattern in silver's price chart, spanning 50 years. This pattern is a bullish indicator that typically signals an impending breakout.
The pattern began with twin peaks of nearly $50 in 1980 and 2011, forming the "cup." The "handle" has been forming since 2011, and a breakout above $50 could lead to significant price gains.
This cup-and-handle pattern mirrors a similar long-term pattern in gold, which recently broke out to all-time highs earlier this year. Maharrey suggests that silver may be on the verge of following gold’s lead, potentially pushing prices to new highs.
Demand and Supply Imbalance: A Recipe for Higher Prices
On the supply side, silver has been in a market deficit for the past three years, with more silver consumed than mined. In 2024, the market deficit is projected to be 215 million ounces, the second-largest silver deficit on record. Industrial demand hit a record 654.4 million ounces in 2023 and is expected to set another record this year.
The Chinese and Indian markets are playing a significant role in driving this demand. Chinese silver imports have surged, reaching a three-year high of 390 tons last December, and exceeding 400 tons in both June and July of this year.
Meanwhile, Indian silver imports are expected to double, driven by the country’s expanding solar power sector and demand from the electronics industry.
This increasing demand, combined with limited supply, creates a bullish environment for silver. Maharrey notes that we could see a "silver squeeze" similar to the 1980 surge, which drove silver prices to record highs.
Conclusion: Is It Time to Buy Silver?
Maharrey concludes that silver appears to be significantly undervalued compared to gold. With strong technical patterns and robust supply-demand fundamentals, silver is poised for a potential breakout.
He encourages investors to consider adding silver to their portfolios, especially given its historical performance during the latter stages of precious metals bull markets.
Investors looking to capitalize on silver’s potential should act before the anticipated breakout. As Maharrey notes, "You want to have your position in place before things start playing out—not after."
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