Over the last few months, we have questioned the dollar debasement narrative. However, in this commentary, we suspend our views and assume that debasement is real and, further, that it fully explains why gold and silver are rising rapidly. The goal of this exercise is to use gold returns and math to find a fair value silver price.

The graph below on the left shows a relatively strong correlation between the 50-day percentage changes in gold and silver. Note that the trend line formula is “y=1.2223x.” This tells us that for every one percent increase or decrease in gold prices over the last 50 days, silver should increase or decrease by 1.2223%. In the equity market, we would say silver has a beta of 1.2223 versus gold. The graph also shows that the recent 50-day change in silver prices is 97%, compared to 20% for gold. Moreover, the current measurement (orange dot) shows that silver’s outperformance is a gross anomaly based on daily data since 1970.

The graph on the right uses math and the regression formula to show how far silver is extended relative to our model’s fair value price (trend line). Per the math, the fair value of silver is $59.25, representing a 38% discount from current prices. This analysis doesn’t portend that silver prices are due for a rapid decline or that gold is set to soar. It simply provides a perspective on the magnitude of silver’s short-term gross outperformance relative to gold. Even if the debasement argument is logical in your mind, recent price gains in silver appear overdone.
 

What To Watch Today

Earnings
 

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Economy
 

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Market Trading Update

Yesterday, we discussed the market bounce following Tuesday’s “Greenland” rout. Today, I want to turn your attention to the “reflation narrative” we have been discussing lately. That narrative suggests a sustained outperformance in economic growth (GDP) while inflation remains muted. This sounds good in theory, but given that commodities and employment are two major inputs into services and manufacturing, the correlation between strengthening commodities and the economy, and vice versa, should be apparent.
 

Furthermore, commodities tend to be leading indicators, as manufacturers cut back on production as demand falls before that factor shows up in lagging economic data. Currently, while commodities are rising, economic growth has only shown a mild uptick. If economic growth doesn’t gain traction, commodities will likely reflect that.

For now, commodities are running ahead of the data due to market speculation. That is not an uncommon event. What happens next will be worth paying very close attention to, one way or the other.
 

New Data Takes Easing Next Week Off The Table

The BEA revised the third-quarter real GDP to show a 4.4% annualized rate, the fastest growth in two years. Currently, the Atlanta Fed’s GDPNow, shown below, pegs fourth quarter GDP growth at over 5%. At the same time, yesterday’s PCE price index data show tame inflation. Core PCE, the Fed’s preferred measure of underlying inflation, rose 0.2% in November from the prior month, equating to 2.4% annually.

Given the strong economic growth and no signs that inflation is rising due to the increased activity, it is now highly likely that the Fed will not cut rates next week. Furthermore, assuming the data holds over the coming months, it becomes more likely that the Fed will remain on hold for most of the year. The caveat to that projection is the labor market. Despite the strong economic growth, labor market indicators have been weak. If net hiring does not pick up with the economy and inflation remains tame, the case for rate cuts this summer could be made.
 

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