The price of silver plunged this morning as European stock markets rallied on news that the Chinese central bank has left the fixing of its currency near Thursday’s level, a move that has supported Chinese stock markets.
The move higher in Silver and its subsequent collapse was outlined in our Silver outlook two days ago. See Silver May Rally If Correlation to Gold Kicks In.
The same factors we highlighted two days ago are evident again today and silver prices are trading at a discount to gold prices. A regression model (based on daily prices over the last 6 months) suggests that silver should be trading at $14.59 (currently at $14.01). In other words, silver is in desperate need of a catch up with Gold, or gold prices are currently out of line. This implies that silver may revisit yesterday’s high.
Longer-term traders will ignore this and should be comfortably short from near the $14.40 levels of yesterday, with stops just above this level. These traders assume that the dollar will remain strong as the Fed hikes rates in the months ahead, and for today’s NFP to be able to beat the 200K median estimate set by economists (Bloomberg).
Risks to this outlook remain a higher demand from China due to the Chinese New Year (which starts on February 8), and seasonality. Over the last 20 years, silver has tended to rally at 3.82% in the month of January and this may leave silver closing near $14.40 by the end of the month. Seasonality tends to also be strong in February (+3.77%), whilst turning negative from March to June.
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Silver Price | FXCM: XAG/USD
Created with Marketscope/Trading Station II; prepared by Alejandro Zambrano
--- Written by Alejandro Zambrano, Market Analyst for DailyFX.com
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