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Silver Price Forecast: Long-term Bottom Confirmed – Key Levels for XAG/USD

Silver Price Forecast Overview:

  • Silver prices have finally caught up to the performance of gold after its best week since March 23, when the Fed announced its extraordinary easing program.
  • Expanding silver volatility has proved helpful during the latest silver price rally, and even a contraction in silver volatility may not weigh down silver prices.
  • Recent changes in sentimentsuggests that silver prices may continue higher in the near-term.
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Silver Prices Surge Higher

Silver prices, alongside the broader precious metals complex, are having their best week in four months on a mix of renewed global economic optimism, concerns about trade tensions between the US and China, and evidence that the stimulus spigot – both fiscal and monetary – will remain open in developed economies for some time to come.

In the prior update at the start of July, it was noted that, “coupled with rising volatility among precious metals, it may be the case that silver prices play catchup to their golden counterpart.” At the time that report was written, gold prices were up by +18.3% while silver prices are up by +2.3%, year-to-date. Now, as the ink dries here, silver prices have overtaken gold prices, up +26.3% versus +25.2% year-to-date.

It’s been the case that the base case scenario of expansion fiscal and expansionary monetary policies will an environment for falling real yields, which historically has been beneficial to precious metals like silver prices. This backdrop appears to be strengthening: short-term rates are stuck near zero while growth and inflation rates are rising among developed economies in Asia, Europe, and South America.

Consistent with our outlook for gold prices, it still holds that these factors will continue to enhance the negative real yield argument that has been fueling gold and silver’s rallies in recent months, and moreover, the breakout that has been experienced in recent days.

Hand-in-Glove: Silver Prices and Silver Volatility

While both gold and silver are precious metals that typically enjoy a safe haven appeal during times of uncertainty in financial markets, the scale and scope of the economic fallout from the coronavirus pandemic 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 an historic collapse.

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.

VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (MARCH 2011 TO JULY2020) (CHART 1)

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Silver volatility (as measured by the Cboe’s gold volatility ETF, VXSLV, which tracks the 1-month implied volatility of gold as derived from the SLV option chain) was last spotted at 52.56, a gain of approximately 65% from its July low. Overall, the recent surge in silver prices has gone hand-in-glove with the gains in silver volatility, leading to a normalization of the typical relationship. The 5-day correlation between VXSLV and silver prices is 0.95 and the 20-day correlation is 0.91. One week ago on July 17, the 5-day correlation was 0.20 and the 20-day correlation was -0.47.

It’s worth noting that, even as silver volatility has come back in from its weekly high of 68.29, silver prices have maintained their gains. The silver price-silver volatility relationship has taken on a form similar to that of the gold price-gold volatility relationship. And so, the axiom holds: given the current environment, falling silver volatility is not necessarily a negative development for silver prices, whereas rising silver volatility has almost always proved bullish; in the same vein, silver volatility simply trending sideways is more positive than negative for silver prices.

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (JUNE 2013 TO JULY 2020) (CHART 2)

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In the last silver price forecast update it was noted that “the longer-term bullish momentum profile would improve meaningfully should a bullish breakout above the parallel of the descending trendline from the August 2013 and July 2016 highs, at which point it may be time to declare the long-term bottoming effort as officially completed; the multi-month rebound would be underway.” Such events have transpired, and so we must declare that the long-term bottom process has been established.

This is a very strong indication that market sentiment had evolved, insofar as looking past the negative aspect of silver’s economic uses and focusing more on the positive aspect of silver’s safe have appeal. For what it’s worth, now that the Federal Reserve has boosted its balance sheet past $7 trillion, the economic fallout argument that’s been weighing down silver prices has been diminished.

Silver prices are now aiming higher towards the late-2013 swing high at 25.1193, and then the 38.2% retracement of the 2011 high to 2020 low range at 26.2233. A pullback below the 23.6% retracement at 20.6500 would provoke a re-assessment of the budding bullish potential.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (JULY 2019 TO JULY 2020) (CHART 3)

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Having conquered the parallel from the descending trendline from the August 2013 and July 2106 highs, price action has confirmed the breakout from ascending triangle consolidation – one which we suggested pointed to “the potential for more gains in the coming sessions” in the prior update.

Silver prices are holding above their daily 5-, 8-, 13-, and 21-EMA, while daily MACD continues to rise in bullish territory while Slow Stochastics have lingered in overbought territory. Like gold prices, the market is in the midst of a strong breakout move, and as such, our attention shifts from pattern-based analysis to more explicitly momentum-based analysis. During such a breakout, it’s important to keep things simple: the market is geared higher until the daily 5-EMA is lost, which silver prices have not closed below since breaking out on June 24.

IG Client Sentiment Index: Silver Price Forecast (July 24, 2020) (Chart 4)

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Silver: Retail trader data shows 87.18% of traders are net-long with the ratio of traders long to short at 6.80 to 1. The number of traders net-long is 0.47% lower than yesterday and 1.83% higher from last week, while the number of traders net-short is 8.05% higher than yesterday and 5.62% 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