SILVER TODAY – Has sentiment turned positive?

Jan 10, 2017 - 12:07 PM GMT
by
Short Term:
Medium Term:
Long Term:
Resistances:
R1 17.85 200 DMA
R2 21.13 2016 high (July)
R3 20.00 Key level
R4 22.18 2014 high (February)
Support:
50 16.76
200 17.85
20 16.17
100 17.65
Support:
S1 16.00 Key support
S2 15.00 Key support
S3 13.64 2015 low
Stochastics:
Legend:

Technical Comment

Momentum is in positive territory and ADX is below 20, which could suggest the presence of weak uptrend in motion.

Analysis

  • Silver has pushed higher since finding some support at $16 at the end of last year, breaking above its 20 DMA, which reflects stronger sentiment. We have therefore turned bullish over the very short term (around one month). Still, we may be too early considering the weakness of the trend for now.

  • On the upside, we see next key resistance at $17. On the downside, a firm break below the 20 DMA could prompt renewed downward pressure toward the psychological level of $16 and then $15.

Macro drivers

Silver is a little firmer since the start of the week after enjoying a decent rally of roughly 3.5% last week amid a broad-based appreciation across the precious metals, particularly the PGMs.

The macro environment for precious metals has become slightly more favourable since the start of the year – the dollar has started to consolidate after a significant rally in November and December while US real rates have drifted lower. Against this backdrop, investor sentiment toward precious metals has improved.

In the fundamentals, global industrial demand for silver may surprise on the upside next year thanks to stronger dynamics in world industrial production, supported by fiscal stimulus measures. The OECD upgraded its global growth forecast for 2017 to 3.3%.

At the macro level, investors will focus to Fed chair Janet Yellen’s speech on Friday, which in turn may affect silver prices via a change in the dollar and US real rates.

Investment and speculative flows:

  • Silver ETF holdings – at 20,230 tonnes as of January 9 – are up eight tonnes so far this year after falling 193 tonnes or 1% in December and 381 tonnes or 2% in November. We wait to see whether stronger risk aversion prompts ETF investors to rebuild long exposure in silver.
  • Speculative positioning rose for the first time in three weeks over December 27-January 3, the latest CFTC statistics show. Looking ahead, we think the net spec length will increase steadily throughout the first quarter given our view that risk aversion should pick up in the near term. Similarly to gold, however, we expect speculative selling to resume in the second half of the year, which should put silver prices under pressure over the whole of 2017.

Conclusion

We are slightly bullish towards silver over the very short term (around one month) after the break above the 20 DMA to take advantage of current upward momentum. But given our low level of conviction, we would see a renewed break below the 20 DMA as a sufficient signal to turn bearish again.

We are neutral on silver over the short term – although risk aversion may pick up at the start of the year, investors could favour gold at the expense of silver to protect their portfolios against tail risk given silver’s high correlation with risky assets at times. 

We are neutral over the medium term and slightly constructive over the long term because we think the global macro and political environment will be increasingly characterised by heightened uncertainty. Investors may boost their exposure to safe havens such as silver, with no government/central bank policy risk due to their inherent intrinsic value.

For more information, see our December Spotlight

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.