Silver: Outlook bearish in short term on rate cut delays; details here

Performance:

Silver has come under renewed downside pressure as the US Federal Reserve delivered a hawkish pause in its monetary policy meeting that concluded on June 12.

The US CPI data released on June 12 were softer than expected on all counts as even the sticky component of core services inflation turned out to be negative. However, the US Federal Reserve, somewhat unexpectedly, was cautious in its assessments and projections at its FOMC meeting. 

The Fed’s dot plot sees just one rate cut this year, though it sees an additional rate cut next year, which will bring down the Fed Fund rate to 4 per cent next year.

As the Fed chose to be patient to gain more confidence on inflation progress before it can decisively signal slashing interest rates this year, the US Dollar Index rallied, and commodities fell.

Spot silver was trading with a huge loss of 1.92 per cent at $28.95 at the time of the MCX closing. The MCX July silver contract was at Rs 87,983 at that time, down 2.75 per cent on the day.

Data and event roundup:

The much-awaited US CPI data (May) fell short of expectations on every count. The headline inflation was steady m-o-m versus the forecast of a rise of 0.10 per cent. This was the slowest gain in seven months; the core CPI inflation rose 0.20 per cent m-o-m against the forecast of 0.30 per cent. The headline CPI inflation rose 3.3 per cent y-o-y as against the expectation of 3.40 per cent  increase, while core CPI inflation rose 3.40 per cent, which fell short of the forecast of 3.50 per cent rise, and was the slowest gain in three years. 

The Fed at its FOMC meeting concluded on June 12 came out with its fresh dot plot. The inflation projections are higher as the dot plot raised median 2024 PCE inflation to 2.6 per cent from 2.4 per cent, and median core PCE to 2.80 per cent from 2.60 per cent in March. Similarly, the next year’s inflation projections have been revised higher to 2.3 per cent from 2.2 per cent.

The markets’ hopes of multiple rate cuts this year have been belied, at least for now.

The US data released on Thursday also showed softer than expected PPI (May). PPI final demand (May) came in at -0.20 per cent m-o-m versus the forecast of 0.10 per cent, PPI ex food and energy was steady m-o-m compared to the expectation of 0.30 per cent. PPI final demand y-o-y at 2.20 per cent fell short of expectation of 2.50 per cent, whereas PPI ex food and energy rose 2.20 per cent versus the prediction of 2.50 per cent. Initial jobless claims surged to 242K, sharply above the forecast of 225K. Even continuing claims topped the forecast.

Dollar Index and the US yields

The US bonds defied the hawkish Fed on Thursday as the yields slipped further to 4.245 per cent, the cycle low, at the time of MCX closing. The US Dollar Index at 105.20 was up 0.53 per cent.

Geopolitical watch:

The European Union lurching towards the far-right is weighing on market sentiment and the single currency.

ETF and COMEX Inventory

Total known global silver ETF holdings stood at 688.736 Moz as on June 12 as the ETFs recorded three consecutive days of inflows.

COMEX silver inventory rose for the second straight day on June 12 to take the total net holdings to 297.191 MOz.

Outlook:

The white metal has turned quite volatile amid choppy trading conditions on delayed rate cuts, diminishing possibility of multiple rate cuts in the USD, poor risk appetite, soft US inflation data and constructive fundamentals.

The white metal looks vulnerable after falling through the key support zone of $28.92-$29. The metal may fall to $28.50 (Rs 86,600)/$27.50 (Rs 83,600) in the short term. However, a medium to long term outlook is constructive. 

Resistance is at $29.77 (Rs 90,400)/$30.03 (Rs 91,200)/$30.60 (Rs 93,000). Short term outlook is bearish, though we expect the metal to bottom out sooner rather than later as both CPI and PPI readings out of the US have been soft. 

Key central banks like the Bank of Canada and the European Central Bank have started slashing rates. The US yields remain depressed despite a hawkish and cautious Fed. Intrinsic fundamentals of silver are bullish on record industrial demand, green energy usages and fourth consecutive year of deficit. 

(Praveen Singh is associate vice president of fundamental currencies and commodities at Sharekhan by BNP Paribas. Views expressed are his own.)