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Silver Price Forecast: Ready to Play Catch Up? - Key Levels for XAG/USD

Silver Price Forecast: Ready to Play Catch Up? - Key Levels for XAG/USD

2020-07-07 21:15:00
Christopher Vecchio, CFA, Senior Strategist
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Silver Price Forecast Overview:

  • Silver prices have lagged their golden counterpart throughout the coronavirus pandemic. However, silver prices may soon be ready to stretch their legs.
  • Silver volatility has started to edge higher, which given the contextual performance of other asset classes, may be a sign that more gains are on the way for silver prices.
  • Recent changes in sentimentsuggests that silver prices may soon breakout to fresh highs.
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Silver Prices Left Behind; Ready to Shine?

The flood of central bank liquidity during the coronavirus pandemic undoubtedly provided stability to financial markets. While this flood of liquidity initially found the path of least resistance by flowing into gold, silver prices were decidedly left behind: year-to-date, gold prices are up by +18.3% while silver prices are up by +2.3%.

Now, as the coronavirus pandemic persists in the United States in particular, the prospect of persistently low rates and excessive fiscal deficits have curated an environment for falling real yields – an environment in which silver prices tend to outperform. Coupled with rising volatility among precious metals, it may be the case that silver prices play catchup to their golden counterpart.

It’s worth nothing that during the height of the US housing market crash and early stages of The Great Recession in 2008 and 2009, neither gold nor silver prices performed well. Instead, their gains came on the side of financial market stabilization: the gold and silver bull run was at its strongest in 2010 and 2011 (peaking in September 2011).

Silver Prices Running Ahead of Silver Volatility

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.

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.

VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (MARCH 2011 TO JULY2020) (CHART 1)

Silver Price Forecast: Ready to Play Catch Up? - Key Levels for XAG/USD

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 rebounded more than 10% since its low in late-June, currently trading at 34.42. However, silver volatility remains severely depressed relative to its all-time high set during March when VXSLV hitting 113.68.

The recent bump in silver prices has coincided with the rebound in silver volatility in the past two weeks, leading to a normalization of the typical relationship. The 5-day correlation between VXSLV and silver prices is 0.51 and the 20-day correlation is -0.52. One week ago on June 30, the 5-day correlation was -0.09 and the 20-day correlation was -0.09, and one month ago on June 9, the 5-day correlation was 0.06 and the 20-day correlation was -0.26.

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

Silver Price Forecast: Ready to Play Catch Up? - Key Levels for XAG/USD

The parallel from the descending trendline from the August 2013 and July 2106 highs comes into play against the June 2020 high at 18.3896 over the course of the next week. Recent price action suggests that silver has been consolidating in an ascending triangle after bottoming in March, outlining the potential for more gains in the coming sessions.

Silver prices are holding above their daily 5-, 8-, 13-, and 21-EMA, while daily MACD has started to rise while in bullish territory and Slow Stochastics have moved back towards overbought territory. The conditions for a bullish breakout are set; failure comes below the July 2 low at 17.7669.

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

Silver Price Forecast: Ready to Play Catch Up? - Key Levels for XAG/USD

The longer-term bullish momentum profile would improve meaningfully should a bullish breakout above the parallel of the descending trendline from the August 2013 and July 2016 highs, at which point it may be time to declare the long-term bottoming effort as officially completed; the multi-month rebound would be underway.

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. For what it’s worth, now that the Federal Reserve has boosted its balance sheet past $7 trillion, the economic fallout argument that’s been weighing down silver prices has been diminished.

Failure to break through 18.3896 resistance by the end of July 2020 would be a poor omen for silver prices.

IG Client Sentiment Index: Silver Price Forecast (July 7, 2020) (Chart 4)

Silver Price Forecast: Ready to Play Catch Up? - Key Levels for XAG/USD

Silver: Retail trader data shows 87.18% of traders are net-long with the ratio of traders long to short at 6.80 to 1. The number of traders net-long is 0.47% lower than yesterday and 1.83% higher from last week, while the number of traders net-short is 8.05% higher than yesterday and 5.62% higher 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.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current 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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