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Silver Price Forecast: Time to Shine? Not Yet - Key Levels for XAG/USD

Silver Price Forecast: Time to Shine? Not Yet - Key Levels for XAG/USD

2020-04-23 15:00:00
Christopher Vecchio, CFA, Senior Strategist
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Silver Price Forecast Overview:

  • Silver prices have not enjoyed the same gains that gold prices have, and for good reason: silver has real economic uses in jewelry and industry (electronics and solar panels, for example).
  • Now that the economic fallout from the coronavirus pandemic has been discounted in forward-looking growth estimates, will silver be seen as a safe haven again?
  • Recent changes in sentiment suggests that silver prices may trade sideways through the end of the week.
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Silver Prices Washout on Economic Concerns

Silver prices have not enjoyed the same safe haven appeal that gold prices have in recent weeks, with silver prices hitting their lowest level since January 2009 while gold prices recently touched their highest level since November 2012. This is due to silver’s uses in the real economy: its used in jewelry and industry (electronics and solar panels, for example). The dramatic collapse in global consumption has dramatically weakened the economic foundation that silver once stood upon.

Silver Volatility Menaces Silver Prices – Back to Normal Soon?

While both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets, the scale and scope of the economic fallout from the coronavirus pandemic has shifted investors’ focus from the positive nature of silver’s safe have appeal during times of crisis to the negative nature of silver’s economic uses during an historic collapse.

Whereas silver prices typically have a positive relationship with silver volatility during normal times – the more uncertainty in financial markets, the greater demand for physical assets like precious metals – that relationship has turned upside-down in recent weeks thanks to silver’s economic uses coming into focus.

VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (MARCH 2011 TO APRIL 2020) (CHART 1)

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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) has started to rebound after its sharp correction lower in recent weeks, currently trading at 52.40. During the silver price collapse in March, silver volatility hit a new all-time high, with VXSLV hitting 113.68.

The 5-day correlation between VXSLV and silver prices is -0.51 and the 20-day correlation is -0.44. One week ago on April 16, the 5-day correlation was -0.13 and the 20-day correlation was -0.83, and one month ago on March 26, the 5-day correlation was -0.88 and the 20-day correlation was -0.98. In other words, given the development of the 20-day correlation over the past month, it’s evident that the silver price and silver volatility relationship is starting to normalize (but not yet!).

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (APRIL 2019 TO APRIL 2020) (CHART 2)

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The recovery in silver prices has carried the precious metal back towards a key area that has proved to produce turns in the market, both bullish and bearish, going back to 2018. This region’s support comes in at 15.9239 (shaded red on the chart above), which in turn serves as near-term resistance for the current silver price rally off the March lows.

To this end, the descending trendline from the August 2013 and July 2106 highs comes into play just below 15.9239 over the coming sessions. These are formidable resistance levels to deal with; traders should remain cautious. But should silver prices re-establish themselves into this key region, and ultimately clear the region’s resistance at 16.7456, it will be time to shine once more.

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2013 TO APRIL 2020) (CHART 3)

Silver Price Forecast: Time to Shine? Not Yet - Key Levels for XAG/USD

The longer-term bullish momentum profile weakened dramatically after failing to breakout above the descending trendline from the August 2013 and July 2016 highs, but it may be too soon to declare the bottoming effort dead yet – particularly if silver prices are able to retake that 16.7456 level once again.

This would be a strong indication that market sentiment had evolved, insofar as looking past the negative aspect of silver’s economic uses and focusing more on the positive aspect of silver’s safe have appeal.

Failure to get through the 15.9239/16.7456 region would be a poor omen for silver prices, suggesting that the economic fallout from the coronavirus pandemic had not been fully discounted into the market yet.

IG Client Sentiment Index: Silver Price Forecast (APRIL 23, 2020) (Chart 4)

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Silver: Retail trader data shows 89.12% of traders are net-long with the ratio of traders long to short at 8.19 to 1. The number of traders net-long is 4.51% higher than yesterday and 10.43% lower from last week, while the number of traders net-short is 21.69% lower than yesterday and 0.76% 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 more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Silver trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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