Weekly Commodity Analysis
Silver is in a $6 range between the lows of $23 and the highs of $29. Starting with the technical rather than the fundamentals a Point and Figure chart shows where the significant support and resistance comes in to play. Traders looking to capitalise on the more volatile precious metal should keep an eye on the supporting lines as areas to buy value.
The impulsive move in Silver that originated in March 2020 has since been in a bullish flag from the August of 2020. A break higher than the $29 on this chart would open up upside potentials towards the $35 as a first target and then possibly above $41. Similarly, if price were to close lower than the support, $20 looks like a good downside target.
Using a more familiar looking chart the closing prices indicate that Silver is currently trading around the rising support line and that if we should get a close below the trend line, the next support is at the range lows as dynamic support from the 200 ema has been removed.
Trading below the 200 ema does become problematic if that dynamic support now becomes significant resistance. The daily stochastic (10,3,3) is indicating that a short-term bounce is due, so silver bulls will be paying more attention to the reaction to the rising trend line.
While the daily 50 ema is above the 200 ema there is a chance that any softening in the US dollar will see a significant rise in the precious metals as they are holding up relatively well as the US dollar index continues to grind higher each day. Silver is down -2.71% these last few months but is still up 26.27% for the last 12 months. Whereas the US dollar index is up 2.05% for the last quarter and down -2.85% for the past year.
The US dollar could be nearing the top of its range and this rising trend channel could break in the opposite direction as the DXY tests the April 2021 highs.
Commodity Trading Advisors (CTA) are generally trend followers, and they are currently positioned long silver with a trigger target of $25.51, which is roughly where the daily 200 ema is. Below that ema price they are starting to liquidate their longs. My idea would be to grab hold of their coat tails when the price moves above the daily 200 ema and see if we can get back up and out of this long-term consolidation range.
Gold has been seen as a safe store of value for 5000 years and precious metals tend to benefit during times of political and financial uncertainty.
Current negative sentiment and worry is arising due to rapidly rising cases of COVID-19 Delta variant in Europe as well as in the United States. The last two trading days has been very risk-off with benchmark 10-year Treasury yields at five-month lows, reducing the opportunity cost of holding non-interest bearing gold.
The inverse relationship between the price of silver and the US 10-year Treasury inflation index security (TIPS) is currently breaking down. If you believe that inflation is transitory inflation adjusted securities as seen in the TIPS is also coming down. Based on the above chart I would expect the next rise in Silver to follow. (at some point)
Silver demand has been broadly based on a store of wealth, the electronic vehicle boom and the quest for Net-Zero emissions for energy. US green electricity will require on average over the next five years around 12 million ounces (m/oz) of silver. Which would rise to 16.5 m/oz between 2026-2030.
As commodity prices rose following last year’s reflation trade idea, China had to step in with regulation measures and price controls, which affected the margin requirements on their stock exchanges. These increased margin requirements and fees reduced the amount of volume traded and has eased the rise in the commodities that the Chinese authorities targeted.
The more Hawkish tones from the Fed in June also put a cap on the prices of precious metals, especially gold. Keeping an eye on the Gold to 10-year yields is a great way to judge the next probable move in precious metals.
The above chart shows the yield curve steepening which is calculated by the US 10 year – the US 2-year yields. Last summer as the yield curve steepened the price of silver rose but silvers acceleration higher proceeded the rise in the yield curve. This to me says the silver markets, if they were to breakout and accelerate higher, any worries around inflation fears that re-emerge would be the catalyst along with any talk of more energy in the reflation trade, maybe due to increase government spending. And as a timing mechanism of when to potentially exit the trade would be when those inflation worries dissipate.
When looking for an entry signal on silver to get long or short, I would always advise making sure the US dollar index is going in the opposite direction as the XAG/USD chart like all other silver charts is inverse to the US dollar index. It would be great to get a chance to buy silver back below $23 but that opens up a potential further loss, so rather than picking a bottom, I favour waiting for market structure to show me a higher set of swing highs and higher swing lows. When prices get back above the daily 200, 50 and 20 ema’s this would be the first part of the long trend trade set up.