Silver Price Forecast Overview:
- Silver prices have stabilized after rebounding at trendline support from the coronavirus pandemic low in March. The fundamental backdrop remains solid given the persistence of negative real yields.
- The recent plunge in silver prices appears to be a function of a crowded market, not the end of the rally. The relationship between silver volatility and silver prices has deteriorated, however.
- Recent changes in sentiment suggests that silver prices are on neutral footing – consistent with the technical outlook examining silver prices within a range.
Silver Prices Stabilize After Reaching Key Support
Silver prices are churning higher after a shocking performance last week, whereby the worst performance in nearly a decade was posted amid an uptick in US Treasury yields. But a look beneath the surface suggests that the selloff was a function of a crowded market, not necessarily a sign that the rally is finished.
It’s worth reflecting on the fact that the US Treasury 2-year yield gained +9.2-bps when silver prices fell by -6.6% last week; whereas it gained +15-bps during through early-June, only triggering a -2.4% drop in silver prices. Like with gold prices, that there was a deeper pullback in silver prices this week amid a more restrained rise in US Treasury yields relative to June suggests that the long silver trade was overcrowded.
We’ve been steadfast with the bullish fundamental argument for silver prices for several months now, and those conditions undergirding the argument have not changed. It has been and remains the case that the base case scenario of expansion fiscal and expansionary monetary policies will an environment for falling real yields, which historically has been beneficial to precious metals like silver prices. These factors should continue to enhance the negative real yield argument that has been fueling gold and silver’s rallies in recent months.
Silver Prices and Silver Volatility Remain in Sync
While both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets, the scale and scope of the economic fallout from the coronavirus pandemic has shifted investors’ focus from the positive nature of silver’s safe have appeal during times of crisis to the negative nature of silver’s economic uses during an historic collapse. While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility as uncertainty increases silver’s safe haven appeal.
VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (MARCH 2011 TO August2020) (CHART 1)
Silver volatility (as measured by the Cboe’s gold volatility ETF, VXSLV, which tracks the 1-month implied volatility of silver as derived from the SLV option chain) was trading at 64.64, off the recent highs but without a corresponding drop in silver prices (a good omen). The 5-day correlation between VXSLV and silver prices is -0.30 and the 20-day correlation is 0.74. One week ago on August 11, the 5-day correlation was 0.35 and the 20-day correlation was 0.92.
It’s important to consider the pullback in silver volatility without the corresponding dip in silver prices. As we’ve explained previously, given the current environment, falling silver volatility is not necessarily a negative development for silver prices, whereas rising silver volatility has almost always proved bullish; in the same vein, silver volatility simply trending sideways is more positive than negative for silver prices.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2013 TO AUGUST 2020) (CHART 2)
Silver prices have experienced a high degree of volatility in the first half of August, but the sharp swings establishing higher highs as well as maintenance of the daily 21-EMA suggest that technical momentum remains bullish. After achieving the 38.2% retracement of the 2011 high to 2020 low range at 26.2233, it now appears that silver prices have carved out a sideways range between 23.4452 and 29.8588. To this end, that silver prices rallied into the consolidation amid a long-term bottoming effort suggests that a bull flag has formed; a topside breakout above 29.8588 is favored.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (AUGUST 2019 TO AUGUST 2020) (CHART 3)
The silver price selloff in early-August amid US Treasury yields meagerly ticking higher (relative to the rise in June) is a sign that a crowded market provoked nervous traders and weaker hands (hopefully) take profit and rebalance their portfolio holdings. Yet as real US yields hold near all-time lows (2-year and 10-year TIPS), the fundamental argument for higher silver prices remains robust. As such, we have little reason to sow doubt on the ongoing bullish breakout.
Silver prices are holding above their weekly 4-, 13-, and 26-EMA envelope, with the weekly 4-EMA serving as critical support last week. But perhaps more importantly, silver prices are holding above the 38.2% retracement of the 2011 high to 2020 low range at 26.2233, which also constitutes key support back from 2011 and 2012 on multiple occasions. Psychologically, holding above 26.2233 will signal confidence in silver’s longer-term bottoming prospects.
IG Client Sentiment Index: Silver Price Forecast (August 18, 2020) (Chart 4)
Silver: Retail trader data shows 85.46% of traders are net-long with the ratio of traders long to short at 5.88 to 1. The number of traders net-long is 6.11% higher than yesterday and 2.51% lower from last week, while the number of traders net-short is 5.75% higher than yesterday and 15.78% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Silver prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Silver-bearish contrarian trading bias.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist