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Silver Prices on Course for Bullish Breakout: Silver to Outperform Gold

Silver Prices on Course for Bullish Breakout: Silver to Outperform Gold

2020-07-01 11:06:00
Justin McQueen, Analyst
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Silver Price Analysis & News

  • Silver on Course for Bullish Breakout
  • Federal Reserve will Remain Expansive for Quite Some Time
  • Second Wave COVID Concerns is a Risk to Silver Outlook
  • Silver Technical Outlook

Silver on Course for Bullish Breakout

As financial conditions remain loose with central banks keeping monetary policy expansive, upside in global bond yields remain capped and thus provides a supportive outlook for precious metals. Last week, we looked at the importance of falling real yields providing a bullish outlook for gold prices. With this in mind, silver prices have also been underpinned, while there is a potential for outperformance in silver, which is highlighted in the gold/silver ratio (Figure 1), given that this precious metal performs better during a recovery phase.

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Figure 1. Silver Outperformed Gold in the Immediate Aftermath of the Global Financial Crisis

Silver Prices on Course for Bullish Breakout: Silver to Outperform Gold

Federal Reserve will Remain Expansive for Quite Some Time

In the most recent FOMC decision, the central bank released its Staff Economic Projections (SEP) which noted that interest rates will remain at 0-0.25% over the forecast horizon. Alongside this, with the Fed also actively discussing the possibility of capping short-term treasury yields, silver prices look to maintain its bullish trajectory.

Silver Prices on Course for Bullish Breakout: Silver to Outperform Gold

Source: Federal Reserve

Second Wave COVID Concerns is a Risk to Silver Outlook

Despite being a precious metal that tends to follow the price action of its counterpart (gold), silver prices are somewhat more sensitive to risk aversion as opposed to the safe-haven gold, given that silver is more widely used in the economy. That said, as concerns mount over a potential second wave of COVID cases across the southern states of the US, lockdown risks have resurfaced. In turn, silver prices could struggle for further upside in the event of more state-wide lockdowns across the US as demand for the safe-haven greenback curbs silver strength. Keep in mind, that traders currently hold the largest net short in the US Dollar in over 2yrs, suggesting that a more pronounced pullback in risk appetite could see a sizeable short squeeze in the US Dollar, which in turn could see silver prices stall.

Investors Most Bearish on US Dollar in Over 2yrs

Silver Prices on Course for Bullish Breakout: Silver to Outperform Gold

Source: Refinitiv Datastream

Silver Technical Outlook

Silver prices have seen a breakout to reach 1-month highs, rising to $18.40. However, key resistance in the form of the descending trendline from the September 2019 peak has capped upside for now. While the outlook remains supportive for silver prices, a breach above trendline resistance is needed for confirmation, which in turn could see a return to the pre-COVID 2020 peak before the 2019 highs. On the downside, support is situated at 1768, which marks the 76.4% Fibonacci retracement.

Silver Price Chart: Daily Time Frame

Silver Prices on Course for Bullish Breakout: Silver to Outperform Gold

Source: IG

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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