Silver Price Outlook:
- The rally from recent lows lacks vigor, suggesting that more downside could be ahead.
- Silver prices have been trading below their daily 21-EMA (one-month moving average) since November 22.
- Recent changes in sentiment suggest that silver prices have a bearish bias in the near-term.
Insignificant Gains
Silver prices slumped back to their yearly low last week before rebounding after the December Fed meeting. But the rally may be short-lived. US Treasury yields are rising again while US inflation expectations (as measured by breakevens and inflation swap forwards) have started to fall back, putting a floor underneath US real yields. Risk appetite is returning across asset classes, which reduces silver’s appeal as a high beta safe haven as well.
Silver Prices and Silver Volatility Relationship Erodes
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. Unfortunately for silver prices, the rebound in silver volatility has been truncated over the past few days, depriving the white metal of an important bullish catalyst.
VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (December 2020 to December 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 27.99 at the time this report was written. The 5-day correlation between VXSLV and silver prices is +0.54 and the 20-day correlation is +0.08. One week ago, on December 14, the 5-day correlation was +0.65 and the 20-day correlation was +0.36.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (December 2020to December 2021) (CHART 2)
Silver prices rallied to their highest level since December 1 earlier today before falling back after failing at its daily 21-EMA. A shooting star candle is now forming on the daily timeframe, suggesting that buying interest has been exhausted in the near-term. The recent shift in bullish momentum is starting to fail, not yet reflected in momentum indicators: daily MACD is rising, albeit below its signal line; and daily Slow Stochastics have advanced through their median line. If the rebound is exhausted, then a grind back towards the yearly low at 21.4328 may transpire through the end of the year.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (March 2011 to December 2021) (CHART 3)
The longer-term view remains valid. “It may be the case that silver prices have been consolidating in a sideways range – a bull flag of sorts – over the past year-plus. The weekly timeframe shows silver prices rebounding from range support at the end of September. A return to and through the 38.2% Fibonacci retracement of the 2011 high/2020 low range at 26.2233 would increase the odds of a move back towards range highs above 29.8000.” As an addendum, a drop below lows at 21.4328 would suggest the flag is breaking lower to the downside, opening up a move below 20.000 in 1Q’22.
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (December 21, 2021) (CHART 4)
Silver: Retail trader data shows 95.16% of traders are net-long with the ratio of traders long to short at 19.66 to 1. The number of traders net-long is 2.79% higher than yesterday and 1.95% higher from last week, while the number of traders net-short is 2.21% lower than yesterday and 8.28% 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Silver-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
