Silver price forecast: back to the August low?

Outlook on the silver price:

• As US dollar and US Treasury bond yields rise, silver prices have plummeted.
• The latest US economic data suggests the economy is weathering concerns about the Delta variant, increasing the likelihood of a Fed taper announcement soon.
• Recent mood changessuggest that the silver price has a mixed bias in the short term.

No silver bullet

Concerns about delta variants remain on the fringes of financial markets, but recent positive surprises in US economic data have brought focus back to the idea that the Federal Reserve may be nearing a throttle anytime soon.

Rising US Treasury yields (as well as US real interest rates) have pushed the US dollar higher (via the DXY index), which has reduced investor appetite for precious metals. Silver is now approaching its worst performance since June 17th, which was preceded by a month-long sideways movement before falling again. These are ominous signs of the price of silver.

Silver prices and silver volatility relationship atypical

Both gold and silver are precious metals that are typically attractive as a safe haven in times of uncertainty in the financial markets. While other asset classes don’t like increased volatility (which indicates greater uncertainty around cash flows, dividends, coupon payments, etc. silver Appeal to a safe haven. The fact that the volatility metrics have ticked higher along with the weakness in silver prices is an important “red flag”.

VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (September 2020 to September 2021) (CHART 1)

silver Volatility (measured by the Cboe’s gold volatility ETF, VXSLV, which is the 1 month implied volatility of Silver- as derived from the SLV Option chain) was trading at 29.96 at the time of this writing. The 5-day correlation between VXSLV and Silver- Prices is -0.97 and is the 20 day correlation -0.43. A week ago, on September 9, the 5-day correlation was +0.86 and the 20-day correlation was -0.40.

TECHNICAL ANALYSIS OF THE SILVER PRICE: DAILY DIAGRAM (February 2020 to September 2021) (DIAGRAM 2)

In early September silver prices attempted to break the descending trendline from their summer swing highs, but a false bullish breakout occurred. The recent fall in silver prices has caused a return to the 38.2% Fibonacci retracement of the 2020 low / 2021 high at 23.0713, which represents the potential for the lowest year-end.

Silver prices are falling below their daily 5, 8, 13, and 21 EMA envelopes, which are rapidly converging in a declining sequential order. The daily MACD is trending down while it is below its signal line while the Slow Stochastics is falling back into oversold territory for the day. A return to the August low at 22.1020 appears likely in the short term.

TECHNICAL ANALYSIS OF THE SILVER PRICE: WEEKLY CHART (November 2010 to September 2021) (CHART 3)

In early August it was stated that “Failure to return to the ascending triangle this week would increase the likelihood of a deeper setback, possibly up to the 23.6% Fibonacci retracement of the 2011 high / 2020 lows at 20.6500” . A loss of the August low at 22.1020 would increase the chances of a return to the 23.6% Fibonacci retracement.

IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (September 16, 2021) (DIAGRAM 4)

Silver: Retail trader data shows that 91.38% of traders are net long, with the ratio of traders long to short at 10.60 to 1, number of traders net short is 6.69% lower than yesterday and 10.40% higher than last week.

We typically take the opposite view of sentiment, and the fact that traders are net long suggests silver prices may continue to fall.

The positioning is more net long than yesterday, but less net long than last week. The combination of the current sentiment and recent changes gives us another mixed trend in silver trading.

— Written by Christopher Vecchio, CFA, Senior Strategist