Silver Price Outlook:
Back to Square One
Last week, on the heels of an impressive start at the start of October predicated on the idea “that the Federal Reserve will soon signal that it intends to slowdown the pace of its rate hikes, culminating in a ‘pause’ in early-2023,” it was noted that “no Fed policymakers have actually argued for a pause, nor has US inflation data rolled over in a meaningful enough way to truly warrant the jubilant narrative that the end of the Fed rate hike cycle is nearing…it is reasonable to cast some dispersion on the notion of a sustained rally moving forward.”
The naysayers have been proved correct thus far, as the rally in silver prices at the start of the month has now been erased: silver prices are down more than -11% from their high last week. It stands to reason that precious metals markets are likely to remain volatile for the foreseeable future, particularly with the September US inflation report on Thursday, which has a chance to spark another swing higher in US real yields (to which silver prices are negatively correlated).
Recommended by Christopher Vecchio, CFA
Trading Forex News: The Strategy
Silver Prices and Volatility Relationship Inverted
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. However, this may not be one of those times: increased US equity market volatility is tied to the belief that the Fed will continue along its rate hike path for the foreseeable future, which is harmful for silver prices.
VIX (US S&P 500 VOLATILITY) versus Silver Price TECHNICAL ANALYSIS: DAILY PRICE CHART (October 2021 to October 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 33.62 at the time this report was written. The 5-day correlation between the VIX and silver prices is +0.51 and the 20-day correlation is -0.58. One week ago, on October 5, the 5-day correlation was -0.51 and the 20-day correlation was -0.59.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (October 2021 to October 2022) (CHART 2)
In the prior update, it was noted that “the rally has paused at a familiar juncture: the August high at 20.8435; and the area around a cluster of Fibonacci levels, the 23.6% retracement of the 2011 high/2020 low range and the 50% retracement of the 2020 low/2021 high range between 20.6500/20.8888.” This proved to be significant resistance, as silver prices advanced no further and began their aggressive retracement immediately thereafter.
Momentum has turned bearish in quick order. Silver prices are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is not yet in bearish sequential order. Daily MACD has issued a bearish crossover and is nearing its signal line, while daily Slow Stochastics have dropped below their median line. Ultimately, a return beneath the downtrend from the April (yearly high) and August swing highs would suggest that the bullish breakout has truly failed, and a return to the yearly low at 17.5590 could be on deck.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to October 2022) (CHART 3)
While it was noted last week that there is a “delineation between a longer-term bullish or bearish perspective (at) 21.4500/21.6800,” and “a return back above this range would suggest that the bearish breakout in 2022 failed, and thus a more constructive outlook – through 2023 – would be appropriate,” this never transpired. Accordingly, the bearish breakout remains the primary thrust, suggesting that more weakness may be enroute before the ultimate low is found.
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (October 12, 2022) (CHART 4)
Silver: Retail trader data shows 90.56% of traders are net-long with the ratio of traders long to short at 9.60 to 1. The number of traders net-long is 21.35% higher than yesterday and 30.18% higher from last week, while the number of traders net-short is 10.66% lower than yesterday and 25.09% 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.
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— Written by Christopher Vecchio, CFA, Senior Strategist