Over the past four months, the tide has turned for silver. Comex Silver rallied more than 100%, mainly supported by a host of factors, including the Federal Reserve (Fed) interest rate cut, geopolitical tensions and a slowdown in the global economy.
This, and other indicators, lead us to believe that silver is going to outperform in the coming months and our commodity analysts have delineated some major triggering factors for the silver price rally and indicators that it is in the offing.
The Fed rates and Silver prices usually share an inverse relationship.
The illustration below depicts how Silver prices and Fed rates have moved between 2008 and July 2020.
During 2016 and 2018, the Fed has increased the interest rate from 0.50% to 2.25% and between July 2016 to Nov 2018, silver prices have fallen from $21/ounce levels to $13.87/ounce.
Once again, from Mar 2020 we observe this inverse correlation taking shape as the Fed has been cutting its rate from 1.75% to 0.25%.
During the 2008 global financial crisis, interest rates were near zero levels and soon after, between 2009 and 2011, the price of silver shot up. This time too, US interest rates are close to zero; we can expect silver to run up over the next one to two years.
At the same time, due to the COVID-19 pandemic, central banks around the world have implemented aggressive monetary policy stimulus measures, pumping in trillions of dollars to stabilize financial markets.
These stimulus measures have pushed bond yields significantly lower, creating tailwinds for gold and silver prices.
A weakening in the Dollar Index is generally positive for commodity prices. In fact, the Dollar Index shares an inverse correlated with gold and silver prices. Over the past month or so, continued weakness in the US dollar by approximately 3.6%, has acted as a support factor, keeping prices of gold and silver high. Endorsing the negative correlation, during this period, Comex Silver prices went up by 33.3% and the price of Gold was up by 8.8%. Taking a longer-term view, over the past four months, the Dollar Index went down by 8.8% while silver shot up 74% and gold rose by 32%.
Alright. That’s what has happened in the recent past. But what is triggering the Dollar weakness and will the Dollar Index continue to weaken further?
Put very simply, our analysts expect the weakness to continue…
They have highlighted numerous factors that support this conclusion.
The chart below suggests that between 2009 and 2011, the correlation between the Dollar Index and silver prices became more prominent as silver began gaining. Going forward, the Dollar index and Comex Silver prices are set to plot a similar path and silver can be expected to perform well over the next one to two years.
Technically, on the monthly chart, the Dollar Index is looking weak and our analysts expect it to take strong support at 91 levels on a monthly basis as the 38.2% Fibonacci retracement and trend line support comes around these levels. However, breaking below these levels, the price can drag down towards 87, initially (i.e. the 50% retracement levels), and after that, it can drag down further, towards 83 to 81 levels over the next one to two years.
According to a recent report published by the Silver Institute, global silver mine supply is expected to continue its decline, given the temporary shut-down of operations and production in several significant silver-mining countries, due to the Covid-19 outbreak. Even with most of these mining operations now resuming, global silver mine production is forecast to dip by 7% in 2020.
On the demand side, the COVID-19 crisis negatively impacted silver fabrication demand in the opening half of the year. After a sharp contraction in March-April 2020, silver industrial demand has shown signs of improvement from May onwards, after many key economies gradually lifted lockdown measures. However, weak consumer confidence and a sharp rise in unemployment weighed on demand in many end-user applications, such as automobiles and consumer electronics.
Going forward, some of this consumer drag could be mitigated by a flow-through from various governments’ recently announced infrastructure investment programs, thereby lifting silver industrial demand.
The Gold to Silver ratio represents the number of units of silver required to purchase one unit of gold. This comparison helps traders to decide when to purchase one metal over the other as a lower Gold-Silver ratio indicates that silver is outperforming and a higher ratio suggests gold is doing better.
After hitting a historical high of 1.17 on 18th March 2020, the MCX Gold to Silver ratio has broken the key support level of the channel line on 21st July 2020. Going forward, we expect it will take the next strong support at 0.72, which comes at around 50% of the Fibonacci retracement level (0.31 to 1.14). Once it breaks below this level, our analysts expect it to drag down towards south of 0.61 levels first and then to 0.45 to 0.41 levels over the next one to two-year period.
On the upside, it faces immediate resistance at the channel line, which comes around 0.88 levels approximately. After that, 0.94 acts as a strong resistance level.
Over all, the Gold to Silver ratio currently faces a ‘Negative bias’. So, our analysts expect silver to outperform gold over the next one to two years.
Technically, Comex Silver has formed a bullish pattern with a ‘Double Bottom’ on a monthly basis. This is one of the strongest reversal patterns. According to the pattern, recently it has broken the Horizontal trend line resistance level of $21.08/ounce and our analysts expect it to close above it on a monthly basis.
Going forward, Comex Silver prices can be expected to face an immediate resistance at $26.20/ounce levels (i.e. the Fibonacci retracement of 38.2% from 13.63 to 49.83) on a monthly basis. If and when they break above this level, the price can be expected to head towards $30.7/ounce (50% retracement) over the next three to four months, at first. Later, it could climb to $35/ounce to $41/ounce levels over the next one to two-year period.
However, on a daily/weekly basis, the RSI momentum indicator is trading above the over-bought zone and this suggests that a correction can be expected in the short-term.
Nevertheless, overall, the trend is clearly upwards for silver, making it lucrative to buy on dips.
Technically, MCX Sep Silver price looks good on the monthly chart and our analysts expect it to face strong and immediate resistance at Rs 66,850 levels. Once it breaks above this level, they expect the price to march towards 73,900 levels (Historical High made on 2011) first for a three to six-month period and after that, to Rs 85,000 to Rs 95,000, over a one to two-year period. On the downside, MCX Silver will take strong support at 51k levels and overall the trend is clearly ‘Upwards’
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Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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