Silver Price Forecast: 'Higher Low' Established, Bulls Aren't Done - Levels for XAG/USD
Silver Price Outlook:
- After washing out weak hands around the retail short squeeze mania, silver prices are back on the up-and-up.
- Silver prices, like the rest of the precious metals complex, is faring well as US President Joe Biden’s $1.9 trillion fiscal stimulus efforts look set to succeed.
- Recent changes in sentiment suggest that silver prices hold a mixed bias in the near-term.
Silver Prices Shrug Off Rumor Mill
After a tumultuous end to January and equally rocky start to February, silver prices appear to be working their way through the early stages of a bullish breakout attempt. After washing out weak hands around the retail short squeeze mania, silver prices are back on the up-and-up, having carved out a ‘higher low’ during the recent selloff. Now that US President Joe Biden’s $1.9 trillion fiscal stimulus efforts look set to succeed, silver prices, like gold and platinum, are faring well.
Still Keeping an Eye on Long-term Fundamentals
On the fiscal side, rising government deficits and debts, coupled with prolonged low interest rates, on the monetary side, are curating an environment akin to the 2009 to 2011 period. As the global economy is looking ahead to a period of significant growth post-pandemic, silver prices have a recent historical precedent to suggest that they will benefit over the coming months, if not longer. Once more, as has been noted since April 2020, that long-term technical studies still suggest that a bottoming process is underway.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (February 2020 TO February 2021) (CHART 1)
Silver prices have carved out a higher low, insofar as they found support along key Fibonacci retracements after turning lower from resistance at the backside of the original pandemic trendline from the March and July swing lows. It’s worth noting that December, January, and now February have set higher highs and higher lows than the preceding months.
Silver prices are above their daily EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line, and daily Slow Stochastics reversing course after failing to break below their median line into bearish territory. More evidence of acceleration in bullish momentum contextualized by the symmetrical triangle breakout to new highs relative to 2020 continues to suggest that “the next leg up has begun.”
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (February 2011 TO February 2021) (CHART 2)
The long-term view on silver prices remains bullish. “The recent triangle consolidation is occurring in context of the breakout from the downtrend dating back to the August 2013 and July 2016 highs, suggesting that a long-term bottoming effort is still under way. If the silver price triangle were to breakout to the topside, there would be good reason to suspect that the move had meaningful technical tailwinds pushing prices higher. The near-term bullish breakout in silver prices may be the start of the next leg higher in this multi-year bottoming effort.”
Silver Prices Decouple from Silver Volatility, if Briefly
Both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets. 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 (February 2020 TO February 2021) (CHART 3)
Silver volatility (as measured by the Cboe’s gold volatility ETF, VXSLV, which tracks the 1-month implied volatility of silver as derived from the SLV option chain) was trading at 50.51 at the time this report was written (notably down from the monthly high of 137.95, which is now the new all-time intraday high). The 5-day correlation between VXSLV and silver prices is -0.06 and the 20-day correlation is +0.82. One week ago, on February 1, the 5-day correlation was +0.87 and the 20-day correlation was +0.75.
IG Client Sentiment Index: Silver Price Forecast (February 8, 2021) (Chart 4)
Silver: Retail trader data shows 88.82% of traders are net-long with the ratio of traders long to short at 7.94 to 1. The number of traders net-long is 1.58% higher than yesterday and 15.63% lower from last week, while the number of traders net-short is 15.13% higher than yesterday and 50.19% 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 less net-long than yesterday but more 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
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