Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Silver Is Losing Its Inflation Hedge Status
Transcript
- Lucas: Silver has lost more than 10 percent of its value in the last five trading days. That is not a typo — we are talking about a metal that people have historically piled into when they worry about inflation, and it is getting absolutely hammered. Luna: Yeah, I saw that. Gold is down too — about 3 percent over the same stretch — but silver's drop is just brutal. It is trading around 58 and a half dollars an ounce right now, down from the mid-60s just a couple weeks ago. Lucas: And this is happening even though CPI came in slightly hotter last month — the headline index hit 334, up from about 332.4 in April. Core CPI is also creeping higher. So the usual narrative would say: inflation is sticky, buy hard assets. But the market is voting the other way. Luna: It makes you wonder if the old playbook still works. Before we go deeper on that, I want to mention something quickly — we keep this show ad-free, and that is only possible because some of our listeners choose to support us directly. If our conversations about protecting your purchasing power have helped you think about your own decisions differently, you can find us at buy me a coffee dot com slash fexingo. Lucas: And it genuinely makes a difference — it keeps the lights on and lets us keep digging into angles like this one without worrying about sponsors or clickbait. So thank you to anyone who has already chipped in. Okay — back to silver. Lucas: The core issue is that silver is not just a monetary metal. About half of global silver demand comes from industrial uses — solar panels, electronics, automotive components. That makes it vulnerable to economic slowdown fears in a way that gold is not. Luna: Right — gold is almost purely a store of value and a portfolio hedge. Silver has this dual identity, and when the market starts pricing in slower growth, the industrial side drags the whole thing down. Lucas: Exactly. And we are seeing that real-time. The ten-year breakeven inflation rate — which is the market's expectation for average inflation over the next decade — has fallen to 2.18 percent. That is down from 2.21 just a day earlier. It is a small move, but the trend has been softening for weeks. Luna: So the market is basically saying: inflation is not accelerating, it is maybe even starting to cool a little. And if that is the case, the whole inflation-hedge trade loses its urgency. Lucas: Right. And on top of that, real yields are still relatively attractive. The Fed funds rate is sitting at 3.63 percent, and the Fed is not cutting anytime soon. When you can earn that kind of yield on cash or short-term bonds, holding a commodity that pays no yield and costs money to store becomes less appealing. Luna: Especially silver — it is bulky, you need secure storage, and the spreads can be wide. Gold at least has the central bank bid and a deeper, more liquid market. Lucas: That is a big part of why we are seeing silver underperform so dramatically. The gold to silver ratio has been widening again — it is now around 70 ounces of silver to buy one ounce of gold. Historically, when that ratio spikes, it can signal that silver is oversold, but it can also stay elevated for years. Luna: And let's be honest — a lot of retail investors got into silver over the past couple of years because of the inflation narrative. They saw it as cheap gold. Now they are getting burned, and that can create a vicious cycle of selling. Lucas: There is also a technical factor here. The GDX — that is the gold miners ETF — is down over 7 percent in the last five days. Silver miners specifically are getting hit even harder. When mining stocks fall that fast, it often forces leveraged traders to liquidate positions, which feeds back into the metal prices. Luna: It sounds like a lot of forced selling rather than a calculated reassessment of silver's long-term value. Lucas: Partially. But I think the bigger story is that the inflation-hedge trade is being repriced. Look at TIPS — Treasury Inflation-Protected Securities — they have also been underperforming recently. Even the iShares TIPS ETF is down over the past month. So the whole complex is under pressure. Luna: So if someone is listening and they own silver or are thinking about buying the dip — what should they be watching? Lucas: I would watch three things. First, the breakeven inflation rate — if it stabilizes or starts rising again, that could be a signal that the inflation scare is back. Second, industrial data — look at the PMI numbers, especially for manufacturing and electronics. If those improve, silver's industrial demand story gets stronger. Luna: And the third? Lucas: The Fed. Any hint that they might cut rates sooner than expected would be a huge tailwind for silver, because lower rates reduce the opportunity cost of holding it. But right now, the Fed is on hold, and the market is not pricing in a cut until at least the fall. Luna: So we are in a waiting game. And in the meantime, silver is taking the brunt of the pain. Lucas: It is. And I think it is worth remembering that silver has always been more volatile than gold. In the 2020 pandemic crash, silver fell about 35 percent in a matter of weeks, while gold dropped maybe 12 percent. The recovery was sharp too, but the ride is much rougher. Luna: That is the flip side — when the turn comes, silver can rally faster than gold because of its smaller market and higher beta. But you have to survive the drawdown first. Lucas: Exactly. And that is the tension. If you believe inflation is structurally higher and that the industrial economy will rebound, silver at 58 dollars could look like a bargain in a year. But if you think we are heading into a recession and inflation continues to moderate, silver could go lower still. Luna: What about the silver ETFs? SLV is the biggest one — that is down about 4.5 percent over the past five days, which is less than the spot price drop. Is that telling us something? Lucas: It might be that some institutional investors are using the ETF to add exposure without taking physical delivery. But the discount to net asset value has been widening, which suggests some selling pressure in the ETF itself. It is not a clean signal either way. Luna: Let me ask a broader question — does silver still deserve a place in a diversified inflation-hedge portfolio? Lucas: I think it does, but with a much smaller allocation than gold. Historically, a 5 to 10 percent allocation to precious metals has helped portfolios during inflationary spikes. Within that, I would keep silver at maybe a quarter of that — so 1 to 2 percent of your total portfolio. Enough to benefit if it moons, not enough to hurt if it gets cut in half. Luna: That sounds like the kind of sizing that lets you sleep at night. Lucas: Exactly. And if you are going to own it, you have to be prepared to hold through these corrections. The people who made money on silver in the 2000s and in 2020 were the ones who bought when everyone else was panicking. Luna: Which is exactly what is happening right now. But it takes conviction and patience. Lucas: It does. And that is why I think the most useful thing we can do today is to help people understand the forces at play, so they can make their own call. Silver's losing streak looks scary, but it is also a reminder that no inflation hedge works in a straight line. Luna: Especially not one that has to serve two masters — monetary demand and industrial demand. Lucas: Right. And right now, the industrial side is dragging it down. But that could change quickly if the economic data shifts. We will keep watching it. Luna: Thanks for joining us. We will be back tomorrow with another angle on protecting your purchasing power in this environment.