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Silver Price Outlook:
- Silver prices have stabilized over the past few weeks, but the worst may not be over yet.
- A symmetrical triangle in context of the preceding move lower suggests the next move will be to the downside for silver prices.
- Recent changes in sentiment suggest that silver prices have a mixed bias in the near-term.
Stability Doesn’t Mean Recovery
Silver prices have been trading sideways for over a month, unable to achieve a significant recovery after setting a fresh 2022 low – and breaking their 2021 low – back in May. The fact of the matter is that fundamental headwinds remain significant.
The continued rise in nominal US Treasury yields alongside sagging US inflation expectations (as measured by breakevens and inflation swap forwards) have boosted real US yields; historically, positive real US yields are correlated with losses by silver (and gold as well). Moreover, amid growing recession concerns among developed economies, silver’s industrial-usage role is being undermined.
Accordingly, the weak fundamental narrative for silver prices underpins a still-weak technical outlook, regardless of the relative stability that has transpired since mid-May.
Volatility Shift Bodes Poorly for Silver Prices
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 recent pullback in US equity volatility suggests a more difficult environment for silver prices near-term.
VIX (US S&P 500 VOLATILITY) versus Silver Price TECHNICAL ANALYSIS: DAILY PRICE CHART (June 2021 to June 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 30.11 at the time this report was written. The 5-day correlation between the VIX and silver prices is +0.10 and the 20-day correlation is -0.46. One week ago, on June 14, the 5-day correlation was -0.80 and the 20-day correlation was -0.39.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (June 2021 to June 2022) (CHART 2)
Silver prices set their 2022 low in May, and after reaching a confluence of Fibonacci retracements, stability has emerged. But stability doesn’t mean recovery, and the consolidation that’s emerged has taken the shape of a symmetrical triangle. In context of the preceding move to the downside, the triangle’s favored breakout direction would be lower.
While momentum has neutralized, silver prices have not made a meaningful move higher. Silver prices are intertwined among their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD continues to climb but remains below its signal line, daily Slow Stochastics are holding around their median line. A ‘sell the rally’ perspective remains appropriate as long as the June high at 22.5175 is respected.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to June 2022) (CHART 3)
As the range that formed starting in July 2020 has begun to break to the downside, a longer-term bearish outlook is becoming increasingly appropriate. Momentum remains negative on the weekly chart. Silver prices below their weekly 4-, 8-, and 13-EMAs, and the EMA envelope is aligned in bearish sequential order. Weekly MACD is trending below its signal line, while weekly Slow Stochastics are holding just above oversold territory. A drop below the 23.6% Fibonacci retracement of the 2011 high/2020 low range at 20.6500 would offer a strong confirmation signal that the next leg lower has begun.
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (June 21, 2022) (CHART 4)
Silver: Retail trader data shows 93.81% of traders are net-long with the ratio of traders long to short at 15.16 to 1. The number of traders net-long is 0.71% higher than yesterday and 25.30% higher from last week, while the number of traders net-short is 7.88% higher than yesterday and 3.26% 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.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Silver trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist
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