Silver Price Forecast: Pullback Dictated by US Real Yields - Levels for XAG/USD

Silver Price Outlook:

• Silver prices have abruptly reversed, turning lower at a cluster of important Fibonacci retracements that were formerly support.
• A rebound in US real yields and a stronger US Dollar are proving problematic in the near-term for silver prices.
• However, recent changes in sentiment suggest that silver prices have a bullish bias.

Real Yields, US Dollar Rebound Weigh

After surging at the end of July and early-August, the silver price rally has hit a meaningful snag. US real yields have moved higher in a non-insignificant manner over the past two weeks (US 10-year real yield up from +0.09% on August 1 to +0.35% today), while a stronger US Dollar is acting as a headwind as well. Against a backdrop where global recession concerns continue to mount while major central banks continue to raise rates aggressively, silver prices have seen obstacles accumulate rather quickly through the turn of the month.

Silver Prices and Volatility Relationship Still Weak

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. A lackluster volatility environment in US equities isn’t doing much for silver prices in the near-term.

VIX (US S&P 500 VOLATILITY) versus Silver Price TECHNICAL ANALYSIS: DAILY PRICE CHART (August 2021 to August 2022) (CHART 1)

US stock market volatility (as measured by the US S&P 500 volatility index, VIX, which tracks the stock market's expectation of volatility based on S&P 500 index options) was trading at 20.53 at the time this report was written. The 5-day correlation between the VIX and silver prices is -0.21 and the 20-day correlation is -0.23. One week ago, on August 10, the 5-day correlation was -0.07 and the 20-day correlation was -0.52.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 2)

After moving higher following the July Fed meeting, the silver price rally stalled out at a cluster of important Fibonacci levels: the 23.6% retracement of the 2011 high/2020 low range; and the 50% retracement of the 2020 low/2021 high range. Silver prices have dropped below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. But momentum is fading quickly, with daily MACD issuing a bearish crossover just above its signal line, while daily Slow Stochastics have plummeted out of overbought territory. A drop below the August low at 19.5519 would open the door for a return to the yearly lows at 18.1423.

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to August 2022) (CHART 3)

Despite the recent rebound, there is an argument to be made that the longer-term outlook remains bearish. Prior to the late-July rally, silver prices broke the 61.8% Fibonacci retracement of the 2020 low/2021 high range at 18.7064, suggesting that the bull run in 2020 and 2021 ended. Silver prices are still below their weekly 4-, 8-, and 13-EMAs, and the EMA envelope is aligned in bearish sequential order. Weekly MACD is on the verge of issuing a bearish crossover while below its signal line, and weekly Slow Stochastics have failed to return above their median line. It may be the case that the path of least resistance is lower, particularly if US real yields remain elevated and the US Dollar rebound gathers pace.

IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (August 17, 2022) (CHART 4)

Silver: Retail trader data shows 88.43% of traders are net-long with the ratio of traders long to short at 7.64 to 1. The number of traders net-long is unchanged than yesterday and 1.55% lower from last week, while the number of traders net-short is 8.23% higher than yesterday and 32.98% 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.

--- Written by Christopher Vecchio, CFA, Senior Strategist