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(Kitco News) - The silver market is seeing some aggressive profit-taking, with prices falling back below $25 an ounce after its recent rally to a nine-week high; however, according to one research firm, the price has room to fall further as the market appears overstretched.
In an interview with Kitco News, Huw Roberts, head of analytics at Quant Insight, said that according to the firm's modeling, the silver price is about 5.7% overvalued. He said that fair value is around $23.86 an ounce.
"The signals we are starting to see in silver are getting interesting," he said. "The rally in silver has overshot its fundamentals."
The modeling from Quant Insight shows that most commodities – gold, silver, copper, and iron ore, to name a few – are significantly impacted by the recent weakness in the U.S. dollar. Last week as gold and silver hit multi-week highs, the U.S. dollar Index dropped below 100 points, hitting its lowest point since April 2022.
Roberts said that this reaction makes sense looking at the broader economic landscape as markets expect next week to be the last time the Federal Reserve raises interest rates in its most aggressive tightening cycle in more than 40 years.
"Generally speaking, if we are seeing peak Fed rate hikes, then it makes sense commodities will benefit from a weaker U.S. dollar," Roberts said.
However, the risk for silver is that the second major market driver for the precious metal is positive economic growth. Roberts said that, unlike gold, silver appears to benefit from a relatively resilient U.S. economy.
"Our modeling tells us that silver wants stronger growth: i.e., its tracking GDP, stronger commodities, easy liquidity. It is in a kind of Goldilocks regime. It's easy money via low rate vol that is well behaved and the dollar moving in a friendly direction," he said.
Although U.S. GDP has held up reasonably well as the Federal Reserve has aggressively raised interest rates, economists and market analysts have said that there is still a possibility that the economy could slip into a recession.
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While silver is overvalued compared to its modeled fair value, Roberts said that for the system to generate a valid signal, QI needs to see macroeconomic conditions turn down.
"We see a lot of warning flags abound silver and it could be an interesting trade, but we don't have a true definitive signal yet," he said.
As for gold, Roberts said that the precious metal remains in a holding pattern as the price hovers close to fair value.
He added that gold investors should continue to keep an eye on the U.S. dollar; QI modeling shows that the U.S. dollar is cheap but not oversold.
"The dollar screams cheap but only modestly cheap," he said. "The selloff is not in overshoot territory, so it has a little room to go lower."
