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Silver Price Forecast: Critical Juncture Appears as US Yields Plunge - Levels for XAG/USD

Silver Price Forecast: Critical Juncture Appears as US Yields Plunge - Levels for XAG/USD

Christopher Vecchio, CFA, Senior Strategist
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Silver Price Outlook:

  • Despite record low US real yields and weaker US Dollar, silver prices haven’t been able to get off the mat.
  • With the delta variant concerns infecting market sentiment, precious metals with higher sensitivity to growth conditions are faring poorly; silver prices remain down.
  • Recent changes in sentiment suggest that silver prices have a bullish bias in the near-term.
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Struggling to Find Footing

Despite what should be a favorable set of fundamental factors for silver prices – record low US real yields and a struggling US Dollar – silver prices have been stuck in the mud for the past few weeks.

In mid-July, it was noted that “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.” This very much remains the lens through which market participants are approaching the precious metal.

Silver Prices and Silver Volatility Relationship Looks Normal

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. Sustained lower volatility and heightened growth concerns, however, don’t create a friendly mix for silver prices.

VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (August 2020 to August 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 29.52 at the time this report was written. The 5-day correlation between VXSLV and silver prices is -0.84 and the 20-day correlation is -0.49. One week ago, on July 28, the 5-day correlation was -0.14 and the 20-day correlation was -0.30.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (July 2020to August 2021) (CHART 2)

The sideways range/ascending triangle in place for the past year may have failed. Since mid-July, silver prices have stayed below ascending triangle support, suggesting that the bullish impulse has faded. But hope springs eternal. Facing the descending trendline from the June and July swing highs, we have now arrived at a critical juncture.

For now, silver prices are intertwined among their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor sequential order. Daily MACD is trending higher but remains below its signal line, while daily Slow Stochastics have recovered to their median line. A move back into the ascending triangle would suggest a false bearish breakout has occurred, and silver prices are back on track for a more sustained bullish outcome.

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to August 2021) (CHART 3)

As noted previously, 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 to return into the ascending triangle this week would increase the likelihood of a deeper setback, potentially 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 (August 3, 2021) (CHART 4)

Silver: Retail trader data shows 92.82% of traders are net-long with the ratio of traders long to short at 12.93 to 1. The number of traders net-long is 0.29% higher than yesterday and 3.41% lower from last week, while the number of traders net-short is 3.95% higher than yesterday and 3.37% 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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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