Silver Price Outlook:
- As the US Dollar and US Treasury yields swing higher, silver prices have plunged.
- The latest batch of US economic data suggests the economy is weathering delta variant concerns, increasing odds for a Fed taper announcement shortly.
- Recent changes in sentimentsuggest that silver prices have a mixed bias in the near-term.
No Silver Bullet
Delta variant concerns remain at the margins of financial markets, but the recent positive surprises in US economic data have returned focus to the idea that the Federal Reserve may be soon approaching a taper announcement.
Rising US Treasury yields (as well as US real yields) have lifted the US Dollar (via the DXY Index), reducing investor appetite for precious metals. Silver prices are now approaching their worst performance since June 17, which preceded a one-month long sideways move before another drop lower. These are ominous signs for silver prices.
Silver Prices and Silver Volatility Relationship Atypical
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. That volatility measures have ticked higher alongside weakness in silver prices is a significant ‘red flag.’
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 -0.97 and the 20-day correlation is -0.43. One week ago, on September 9, the 5-day correlation was +0.86 and the 20-day correlation was -0.40.
SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to September 2021) (CHART 2)
At the start of September, silver prices were making an attempt to climb through the descending trendline from its summer swing highs, but a false bullish breakout materialized. 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.
Silver prices are falling below their daily 5-, 8-, 13-, and 21-EMA envelope, which is quickly aligning in bearish sequential order. Daily MACD is trending lower while below its signal line, while daily Slow Stochastics are slumping back towards oversold territory. A return to the August low at 22.1020 appears likely in the near-term.
SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (November 2010 to September 2021) (CHART 3)
In early-August, it was noted that “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.
IG CLIENT SENTIMENT INDEX: SILVER PRICE FORECAST (September 16, 2021) (CHART 4)
Silver: Retail trader data shows 91.38% of traders are net-long with the ratio of traders long to short at 10.60 to 1. The number of traders net-long is 1.17% lower than yesterday and 10.22% lower from last week, while the number of traders net-short is 6.69% lower than yesterday and 10.40% higher 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 more net-long than yesterday but less 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