Silver Price Outlook:
- Silver prices are facing an impending threat in the form of losing multi-month ascending triangle support.
- With the delta variant concerns infecting market sentiment, precious metals with higher sensitivity to growth conditions are faring poorly; gold prices are up while silver prices are down.
- Recent changes in sentiment suggest that silver prices have a bearish bias in the near-term.
Danger, Will Robinson
Silver prices are facing an impending threat, spurred on by financial markets’ sudden and dramatic shift in focus to the delta variant. The risk-off impulse that has made its way through markets has seen US Treasury yields plunge and both the Japanese Yen and the US Dollar strengthen. While a ‘lower US yields, stronger JPY’ environment typically caters to favorable conditions for silver prices, the context within which we find ourselves today suggests that this is not one of those favorable times.
And while both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets, the potential for economic anew stemming from the delta 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 economic duress.
Silver Prices and Silver Volatility Relationship Strained
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. But environments where silver prices are declining in spite of higher silver volatility tend to be problematic, to say the least.
VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (July 2020 to July 2021) (CHART 1)
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 28.88 at the time this report was written, having established a fresh 52-week low earlier this month. The 5-day correlation between VXSLV and silver prices is +0.66 and the 20-day correlation is -0.48. One week ago, on July 13, the 5-day correlation was +0.57 and the 20-day correlation was -0.65.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to July 2021) (CHART 2)
The sideways range in place since last summer may be failing. While in context of longer-term timeframes this suggests that a multi-month bull flag has been forming, the impending breakdown cannot be dismissed outright. Yesterday produced the first daily close outside of the ascending triangle, suggesting that a bearish breakout is being attempted.
Currently, silver prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD is trending lower below its signal line, and daily Slow Stochastics have dropped quickly into oversold territory. Should silver prices recover back into the triangle by the end of the week, however, there would be grounds to believe that a reversal was taking shape.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to July 2021) (CHART 3)
The weekly timeframe suggests that the perspective on silver is shifting on a longer-term basis as well. Silver prices are no longer progressing within the confines of previous expectations: “silver prices are holding with their multi-month ascending triangle, remaining on track for a return to their yearly high at 30.1365. If accomplished, this would also constitute a potential longer-term bullish breakout, more evidence that a significant bottom has been carved out; the 2011 highs would need to be brought into consideration thereafter.”
Failure here would suggest a deeper setback could emerge, as far as the 23.6% Fibonacci retracement of the 2011 high/2020 low range at 20.6500.
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (July 20, 2021) (CHART 4)
Silver: Retail trader data shows 93.23% of traders are net-long with the ratio of traders long to short at 13.76 to 1. The number of traders net-long is 3.46% higher than yesterday and 2.38% higher from last week, while the number of traders net-short is 11.57% lower than yesterday and 7.91% 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
