Silver Prices Ward Off False Breakout as Bottoming Effort Continues
Silver Price Talking Points:
- Silver prices are spending more and more time above the downtrend from the 2014 and 2016 highs, suggesting that a long-term bottoming effort is taking shape.
- The doji candle established on Tuesday, August 13 has yet to see either its higher or low breached; 16.510 is near-term support while 17.489is near-term resistance.
- Recent changes in sentiment warn that the current spot silver price trend may soon reverse higher despite the fact traders remain net-long.
Global financial markets are in a state of suspended animation as the US-China trade war has moved into a temporary state of détente. And with the Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming coming up next week, traders will likely await either a tweet from US President Donald Trump over the next few days or Fed Chair Jerome Powell’s press conference on Friday before making any significant asset allocation decisions.
Silver Volatility Stays Near Highest Level Since January 2017
Silver volatility (as measured by the Cboe’s gold volatility ETF, VXSLV, which tracks the 1-month implied volatility of gold as derived from the SLV option chain) continues to maintain its elevation after its recent swing higher. VXSLV is currently trading at 25.36 after setting its highest level since January 3, 2017 on August 7 at 26.34.
VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (NOVEMBER 2016 TO AUGUST 2019) (CHART 1)
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 gold’s and silver’s safe haven appeal. To this end, if VXSLV pushes to a fresh yearly high, it is likely that silver prices follow: the 20-day correlation between VXSLV and silver prices is 0.88.
US Yields are a Key Factor
Even as the US-China trade war has moved from a rolling boil to a simmer, assets that have been bid up during the reach for safety have yet to cede significant ground. US Treasury yields, for example, are at or near yearly lows at the short-end of the yield curve, while long-end yields have barely recovered at all.
Now that we’re seeing evidence of topline inflation rising in recent months, ongoing depression in US Treasury yields is sustaining a bullish environment for precious metals like silver.
Why Do ‘Real Yields’ Matter to Silver Prices?
The shifts in US Treasury yields around the latest US-China trade war news feeds directly into one of the most important fundamental underpinnings of precious metals’ rallies: environments that produce falling real yields tend to be the most bullish.
Real yields are inflation-adjusted yields: in this case, the US Treasury 10-year yield minus the headline inflation rate. Why does this matter? Investing is all about asset allocation and risk-adjusted returns. On the asset allocation side, it’s about achieving required returns given the investor’s wants and needs.
If inflation expectations are rapidly increasing, you would expect to see fixed income underperform: the returns are fixed, after all. Why would you want to have a fixed return when prices are increasing? On a real basis, your returns would be lower than otherwise intended.
Falling US real yields means that the spread between Treasury yields and inflation rates are decreasing. If precious metals yield nothing (no dividends, coupons, or cash flows), they would best suited to rally when US real yields fell.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (AUGUST 2013 TO AUGUST 2019) (CHART 2)
The break above the April and September 2017 and the June 2018 swing highs, as well as the 2013 and 2016 swing highs, has been sustained after commencing last week. Efforts earlier this week to return back into the downtrend failed; silver prices have warded off a false breakout attempt. Indeed, the efforts to establish a long-term bottom are gaining more and more legitimacy.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2017 TO AUGUST 2019) (CHART 3)
The doji candle established on Tuesday, August 13 has yet to see either its higher or low breached; 16.510 is near-term support while 17.489is near-term resistance. A move through the doji high would also produce a breach of the April and June 2018 near 17.337.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2017 TO AUGUST 2019) (CHART 4)
For the time being, silver prices remain above their daily 8-, 13-, and 21-EMA, and both daily MACD and Slow Stochastics pointing higher again in bullish or overbought territory. Only a close below the daily 21-EMA – which silver prices have maintained their advance above for every session since July 12 – and a close back into the late-July/early-August consolidation below 16.631 would constitute a near-term top. Otherwise, the past of least resistance is to the topside.
IG Client Sentiment Index: Spot Silver Price Forecast (August 16, 2019) (Chart 5)
Spot silver prices: Retail trader data shows 88.2% of traders are net-long with the ratio of traders long to short at 7.45 to 1. The number of traders net-long is 1.5% lower than yesterday and 5.9% lower from last week, while the number of traders net-short is 7.4% higher than yesterday and 2.1% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Silver prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current spot silver price trend may soon reverse higher despite the fact traders remain net-long.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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