Silver Price Outlook:
- Silver prices remain under pressure as US real yields rise further, supporting a stronger US Dollar.
- Momentum has turned more bearish, and a retest of the yearly lows at 18.1423 may not be far ahead.
- In turn, recent changes in sentiment suggest that silver prices now have a bearish bias.
The resurgent US Dollar (via the DXY Index) and the continued rise in US yields – both nominal Treasury and real – remain obstacles for silver prices in the near-term. In terms of the latter, the US 10-year real yield is up from +9-bps on August 1 to +46-bps today, its highest level since July 21; historically, rising US real yields have a negative correlation with silver prices. With global recession concerns proliferating as central banks raise rates to combat rising inflation – and with price pressures likely to rise into year-end as the global energy supply crisis unfolds – the headwinds silver prices have faced are only strengthening in the near-term.
Silver Prices and Volatility Relationship Still Weak
Both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets. 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. The fact that equity market volatility rose at the start of this week without silver prices benefiting was a concern.
VIX (US S&P 500 VOLATILITY) versus Silver Price TECHNICAL ANALYSIS: DAILY PRICE CHART (August 2021 to August 2022) (CHART 1)
US stock market volatility (as measured by the US S&P 500 volatility index, VIX, which tracks the stock market’s expectation of volatility based on S&P 500 index options) was trading at 23.22 at the time this report was written. The 5-day correlation between the VIX and silver prices is +0.69 and the 20-day correlation is -0.15. One week ago, on August 17, the 5-day correlation was +0.58 and the 20-day correlation was -0.23.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 2)
Last week it was noted that “a drop below the August low at 19.5519 would open the door for a return to the yearly lows at 18.1423.” This condition was achieved, increasing the likelihood of a return to the lows of 2022 in the near-term. Silver prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Momentum remains weak, with daily MACD trending lower below its signal line, while daily Slow Stochastics are holding in oversold territory. More losses can’t be ruled out in the immediate future.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to August 2022) (CHART 3)
Nothing has changed for the longer-term perspective. “Despite the recent rebound, there is an argument to be made that the longer-term outlook remains bearish. Prior to the late-July rally, silver prices broke the 61.8% Fibonacci retracement of the 2020 low/2021 high range at 18.7064, suggesting that the bull run in 2020 and 2021 ended. Silver prices are still below their weekly 4-, 8-, and 13-EMAs, and the EMA envelope is aligned in bearish sequential order. Weekly MACD is on the verge of issuing a bearish crossover while below its signal line, and weekly Slow Stochastics have failed to return above their median line. It may be the case that the path of least resistance is lower, particularly if US real yields remain elevated and the US Dollar rebound gathers pace.”
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (August 24, 2022) (CHART 4)
Silver: Retail trader data shows 93.40% of traders are net-long with the ratio of traders long to short at 14.15 to 1. The number of traders net-long is 3.10% higher than yesterday and 10.85% higher from last week, while the number of traders net-short is 10.84% lower than yesterday and 42.86% 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.
— Written by Christopher Vecchio, CFA, Senior Strategist