Silver continues to gain perceived value moving closer actual value when compared to gold

Friday's economic data releases reinforced market expectations for monetary policy easing while precious metals continued their divergent trajectories, with silver challenging record highs even as gold retreated from recent gains.

Inflation Data Meets Expectations

The Personal Consumption Expenditures (PCE) report released today aligned with analyst forecasts, showing headline PCE inflation rose 0.3% on a monthly basis and 2.8% year-over-year. Core PCE, which excludes volatile food and energy prices, demonstrated modest deceleration to 2.8% from the prior month's 2.9% reading. This gradual cooling in the Federal Reserve's preferred inflation gauge suggests continued progress toward the central bank's 2% target, albeit at a measured pace.

Complementing the PCE data, the University of Michigan's consumer sentiment index improved to 53.3, while inflation expectations showed encouraging trends. One-year inflation expectations declined to 4.1%, with the five-year outlook settling at 3.2%. These figures indicate consumers anticipate a softer trajectory for future price increases, a development that could influence Federal Reserve decision-making in the months ahead.

Market Pricing for Monetary Policy

The combination of these economic reports has solidified trader conviction regarding the Federal Open Market Committee's next move. According to the CME FedWatch tool, which aggregates market-implied probabilities from Fed funds futures trading, there is now an 87.2% likelihood of a 25-basis-point rate reduction at next week's policy meeting—down marginally from the previous day's reading.

What stands out in the current market pricing is the complete absence of expectations for a more aggressive 50-basis-point cut, with the probability showing precisely 0.00%. This unanimity appears somewhat myopic given the pronounced weakness emerging in labor market data and the ongoing disinflationary trend in headline figures. While a 25-basis-point reduction remains the base case, the market's failure to assign even minimal probability to a larger move creates potential for volatility should the Fed surprise with more dovish action. Historically, monetary policy decisions that deviate from near-universal market consensus have triggered outsized market reactions.

Precious Metals: A Tale of Two Markets

Gold futures exhibited weakness in Friday trading, declining $13.10 (0.31%) to trade at $4,229.90, bringing weekly losses to $26.60. This pullback comes after the yellow metal's recent rally to historic highs, suggesting some profit-taking and consolidation.

Silver presents a dramatically different picture. The white metal came within ten cents of the $60 price target established in September analysis when it reached a new record high of $59.90 earlier in the session. Though it has retreated from those intraday peaks, silver futures remain substantially higher, currently trading at $58.93—up $1.43 (2.49%) on the day and $1.83 for the week.

The Gold-Silver Ratio and Future Trajectory

The critical question facing precious metals investors is whether silver's rally concludes upon reaching the $60 milestone. Technical analysis of the gold-silver ratio suggests otherwise. The ratio has recently broken through significant technical support at 72, a level that had previously provided a floor. While minor support levels exist at 70 and 68-69, the ratio appears poised to test deeper support zones at 65 or potentially 62.

From a relative value perspective, silver would need to reach these lower ratio levels before returning to historical equilibrium with gold. Until that rebalancing occurs, silver's fundamental undervaluation relative to gold suggests the rally may have further room to run. However, translating these ratio targets into specific price projections for silver remains challenging, particularly as the market has moved into uncharted territory. The combination of record nominal prices and shifting ratio dynamics suggests silver could reach levels that seemed improbable just months ago.

As markets enter the final trading weeks of the year with a Fed decision looming and precious metals at historic junctures, volatility and opportunity appear likely to persist across both traditional and alternative assets.

Wishing you as always good trading,