Silver: 2.0 breakout for gold on the way?
Yesterday, we were on the cusp of an outbreak or fakeout.
Today we’re taking a look at what has also shown some interesting upward moves over the past week as it posted net gains of 5% over six sessions.
Most importantly, silver has now crossed and held above $ 24 an ounce for five consecutive days, restoring a position of strength shown in late October.
All cards courtesy of skcharting.com
Could silver, which has normally worked in the shadow of gold bars, be in Breakout 2.0 mode based on the apparent turnaround in gold? Could it hit the next major level of $ 25, which would set the stage for a leap toward the metal bulls’ long-held target of $ 30-40?
Or will it stay trapped below $ 25 and start a descending cycle instead?
Let’s look at the different variables and ideas in the game to try to form a coherent picture.
First, a summary of the fundamentals of Silver
Silver has solid industry-based fundamentals, but it has played second fiddle to gold for the past few years, meaning a solo rally rarely survives without the yellow metal.
More than 50% of the silver requirement comes from industrial use. As a malleable metal, it is just as suitable for making jewelry as gold. It is also a good conductor of electricity and is widely used in the manufacture of electronic components.
The transition to clean energy is expected to fuel physical demand for silver in the coming years, particularly for connections in electric vehicles and for components in solar panels. The expansion of the fifth generation (5G) telecommunications networks will also boost demand. But these demand factors are likely to drive silver demand in the future, not now.
Currently, the use of silver in a number of industrial applications affects the price – when manufacturing activity increases, the price increases due to high demand, while a decrease in activity, for example during a recession, pulls the price down.
Because of this, the monthly manufacturing PMI or purchasing managers index numbers from around the world are an important gauge of silver demand as they give an indication of industrial activity.
Compiled by JP Morgan and IHS Markit, the global PMI fell from 55.4 in July to a six-month low of 54.1 in August 2021 as manufacturing growth lost momentum in several major markets (a number above 50 suggests manufacturing expansion while a number below that indicates a contraction). This has weighed heavily on silver in the past few months.
Adding to this bearish factor has been speculation since June about when the Federal Reserve will cut back on its generous monthly incentives of up to $ 120 billion that it has provided to the U.S. economy since March 2020. This speculation weighed on gold and silver prices in the earlier months.
But these two clouds have now cleared.
JP Morgan’s global purchasing managers’ index stabilized at 54.1 in September.
At the end of the stimulus package last week, the Fed would finalize its bond purchases in mid-2022 by cutting $ 15 billion from the program every month for the next eight months. The Fed chairman also assured markets that the central bank will be “patient” in implementing the first rate hike after the pandemic, which is likely to come late next year. This has provided investors across the industry with an additional layer of fiscal stability and security.
Silver traded on the New York COMEX had its first positive month in October and ended four months in the red, rising 8.63%, the best since a 16.8% rally in December 2020.
Now for the technical data of Silver
Precious metals strategist Taylor Dart believes silver is on the rise, with little immediate risk for long positions.
“Given that silver has just emerged from a multi-year bear market and has essentially gone nowhere since 2014, a change in character and the start of a bull market would indicate significant gains,” Taylor wrote in a post that was featured on Stocknews. com site.
He noted that the breakout of silver over a multiyear basis was the first indication of a new bull market.
“For now, silver’s previous multi-year resistance ($ 22.00 / oz) appears to be new support, further evidence of a character change. Assuming this is the case, we are likely in the first 2-3 innings of a new bull market and a doubling in silver over the next few years would not be surprising, indicating a surge above $ 40.00 / oz . “
Regardless of last week’s lead, silver is still at one of its most oversold levels in six years, with its nine-month rate of change falling sharply into negative territory, Taylor added.
“That doesn’t mean the metal has to bottom out here, but if history is any clue, the metal is probably much closer to a bottom than it is to a top right now. Therefore, to retest the recent break in the downtrendline, any pullbacks below $ 23.50 / oz should offer low risk buying opportunities. “
Another precious metals analyst, Anil Panchal, agrees to some extent with Taylor, saying on a blog on FXStreet that silver’s Relative Strength Index would now likely help break the immediate trendline hurdles at $ 24.50 an ounce.
“However, the high in September of $ 24.85 and the threshold of $ 25.00 may challenge the bulls thereafter,” said Panchal, using the symbol for the spot price of silver.
“Should silver stay firmer above $ 25, the focus will be on the June low of around $ 25.50 and the August high near $ 26.”
“Alternatively, pullback moves remain less important until they stay above 61.8% of the Fibonacci retracement of the September month’s downtrend at around $ 23.55.”
In the event of a downturn, the 200-day simple moving average should pull back at $ 23.30, the 50% Fibonacci retracement near $ 23.15 and the round number of $ 23.00 silver bears, he warned.
Skcharting.com’s Sunil Kumar Dixit also fears silver may have exceeded its technically-enabled uptrend for now, though he has no doubt that it can continue to rise over time.
“Silver’s daily chart is showing an overbought Stochastic Relative Strength Index with an 86/91 reading showing negative overlap with the aim of re-indexing the 100-Simple Moving Average of $ 23.77 and $ 23.50 test, which equates to a Fibonacci level of 23.6%, ”said Dixit.
“By and large, silver appears to be trapped at two major Fibonacci levels: support at 23.6% at $ 23.50 and resistance at 38.2% at $ 24.80.”
Dixit said silver needs a strong trigger to break above or below either trend key to determine further course.
“A break above $ 24.80 will push silver to $ 25.80 which is the 50% Fibonacci level,” he said.
“Falling below $ 23.50 will cause silver to revisit the 100-week SMA of $ 22.70.”
Disclaimer: Barani Krishnan uses a range of views outside of his own to bring diversity into his analysis of each market. For reasons of neutrality, he sometimes presents contrary views and market variables. He does not hold a position in the commodities and securities he writes about.