Silver Price Outlook:
- The FOMC’s strongest hint yet that a taper announcement will be made soon has silver prices reeling.
- Rising Fed rate hike odds and firmer intermediate US Treasury yields provoked a sharp turnaround in silver prices at a key technical level.
- Recent changes in sentimentsuggest that silver prices have a mixed bias in the near-term.
Losing Luster, Again
Silver prices wiped out to their August low at the start of the week, in line with the forecast discussed less than a week ago. Bolstered by declining US Treasury yields and fears of financial contagion emanating from China’s Evergrande, safe havens like silver saw significant bidding.
But the shine has worn off quickly. With news that China has stepped into the market to provide liquidity and Evergrande may avoid a default, the need for safe havens in the short-term has dissipated. Now, with the Federal Reserve’s September meeting in the rearview mirror and the FOMC offering its strongest hint yet that a taper announcement will be made as early as their next meeting, silver prices have struggled.
If the situation out of China continues to subside while Fed rate hike odds climb and the US Treasury yield curve acts in a manner consistent with historical precedent established in 2014, then the bearish price action today may be an appetizer for more losses by silver prices through the remainder of September.
Silver Prices and Silver Volatility Relationship Normal Again
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. Declining volatility in a period of tight correlations suggests more downside may be ahead for silver prices.
VXSLV (SILVER VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (September 2020 to September 2021) (CHART 1)
Silver volatility (as measured by the Cboe’s gold volatility ETF, VXSLV, which tracks the 1-month implied volatility of silver as derived from the SLV option chain) was trading at 29.96 at the time this report was written. The 5-day correlation between VXSLV and silver prices is +0.95 and the 20-day correlation is +0.88. One week ago, on September 15, the 5-day correlation was +0.11 and the 20-day correlation was +0.84.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to September 2021) (CHART 2)
Last week it was noted that “the latest drop in silver prices has seen a return to the 38.2% Fibonacci retracement of the 2020 low/2021 high range at 23.0713, setting up the potential for its lowest close of the year…a return to the August low at 22.1020 appears likely in the near-term.” Silver prices briefly touched the August low at the start of this week.
However, more of a concern in the near-term is price action around the September Fed meeting today. The rally off the August low saw silver prices climb back to the aforementioned 38.2% Fibonacci retracement at 23.0713, only to be rejected. The daily candlestick appears to be a shooting star, a reversal signal.
As a result of price action today, silver prices are back below their daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD continues to trend lower while below its signal line, while daily Slow Stochastics are holding in oversold territory.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to September 2021) (CHART 3)
It was also observed last week that a “failure to return into the ascending triangle this week would increase the likelihood of a deeper setback, potentially as far as the 23.6% Fibonacci retracement of the 2011 high/2020 low range at 20.6500. A loss of the August low at 22.1020 would increase the odds of a return to the 23.6% Fibonacci retracement.” Having briefly touched the August low earlier this week, the odds of a deeper setback for silver prices is increasing.
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (September 22, 2021) (CHART 4)
Silver: Retail trader data shows 92.66% of traders are net-long with the ratio of traders long to short at 12.63 to 1. The number of traders net-long is 2.47% lower than yesterday and 8.87% higher from last week, while the number of traders net-short is 4.04% higher than yesterday and 10.43% 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.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Silver trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist