Silver Price Forecast: Gains Digested, New Highs Ahead? - Key Levels for XAG/USD
Silver Price Forecast Overview:
- The silver price rally paused at the end of July as traders took profit and rebalanced their portfolio holdings. With real US yields plunging to all-time lows (10-year TIPS), the fundamental argument for higher silver prices remains robust.
- Another surge in silver volatility would likely prove supportive to silver prices, given the relationship between the two in recent weeks.
- Recent changes in sentimentsuggests that silver prices may continue higher in the near-term.
Silver Prices, Well Rested, Resume Rally
Silver prices just posted an historically excellent month, closing higher by +30.63% in July, its first monthly gain above +30% since September 1989 (+30.37%), and its best monthly performance since December 1979 (+54.36%). Overall, July 2020 ranks as the third-best monthly performance in silver futures’ history (going back to February 1970).
And yet, perhaps thanks to these impressive gains, the last week of the month seem to be deflating for silver bulls. This is not a source of concern, however.
We’ve been leaning into the bullish fundamental argument for silver prices for several months now. It has been and remains the case that the base case scenario of expansion fiscal and expansionary monetary policies will an environment for falling real yields, which historically has been beneficial to precious metals like silver prices.
Consistent with our outlook for gold prices, it still holds that these factors will continue to enhance the negative real yield argument that has been fueling gold and silver’s rallies in recent months, and moreover, the historically bullish move in July.
Silver Prices and Silver Volatility Continue to Track
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 August 2020) (CHART 1)
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) was last spotted at 61.26, doubling the July low of 30.58. The surge in silver volatility occurred in lockstep with the gains by silver prices; but the pullback in silver volatility from the July high of 76.39 has not produced a similar pullback in silver prices. The 5-day correlation between VXSLV and silver prices is 0.17 and the 20-day correlation is 0.95. One week ago on July 29, the 5-day correlation was 0.97 and the 20-day correlation was 0.97.
It’s important to consider the pullback in silver volatility without the corresponding dip in silver prices. As we’ve explained previously, given the current environment, falling silver volatility is not necessarily a negative development for silver prices, whereas rising silver volatility has almost always proved bullish; in the same vein, silver volatility simply trending sideways is more positive than negative for silver prices.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2013 TO AUGUST 2020) (CHART 2)
In the last silver price forecast update it was noted that “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…such events have transpired, and so we must declare that the long-term bottom process has been established…silver prices are now aiming higher towards the late-2013 swing high at 25.1193, and then the 38.2% retracement of the 2011 high to 2020 low range at 26.2233.”
Having achieved the late-2013 swing high at 25.1193 as well as the 38.2% retracement of the 2011 high to 2020 low range at 26.2233, we have yet another piece of evidence that the silver market is in the throes of a significant rally. The weekly charts continue to point higher. A pullback below the 23.6% retracement at 20.6500 would provoke a re-assessment of the budding bullish potential.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (AUGUST 2019 TO AUGUST 2020) (CHART 3)
The silver price rally paused at the end of July as traders took profit and rebalanced their portfolio holdings. With real US yields plunging to all-time lows (10-year TIPS), the fundamental argument for higher silver prices remains robust. As such, we have little reason to sow doubt on the ongoing bullish breakout.
As it were, silver prices are holding above their daily 5-, 8-, 13-, and 21-EMA, while daily MACD continues to rise in bullish territory while Slow Stochastics have started to return to overbought territory. Like gold prices, the market is in the midst of a strong breakout move, and as such, our attention shifts from pattern-based analysis to more explicitly momentum-based analysis.
As noted in the prior silver price forecast, “during such a breakout, it’s important to keep things simple: the market is geared higher until the daily 5-EMA is lost, which silver prices have not closed below since breaking out on June 24.” The daily 5-EMA still holds.
IG Client Sentiment Index: Silver Price Forecast (August 8, 2020) (Chart 4)
Silver: Retail trader data shows 85.95% of traders are net-long with the ratio of traders long to short at 6.12 to 1. The number of traders net-long is 1.29% higher than yesterday and 2.73% higher from last week, while the number of traders net-short is 1.28% lower than yesterday and 6.57% 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.
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.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.