Silver is attempting to return to its ascending channel, which it left early in November. Interestingly, silver has been able break back above its 20 DMA, suggesting improved sentiment. We view the recent strength as a technical retracement rather than a change in trend. But a firm break above the 200 DMA could force us to reassess the situation more closely.
On the upside, if silver manages to move back inside its ascending channel, its next challenge would be to firmly break above the 200 DMA to make sure the uptrend resumes. On the downside, we are closely watching the 20 DMA, a break below which could result in additional selling pressure toward $16 and then $15.
Silver has rebounded since late November while gold has remained under selling pressure, suggesting that the correlation between those two precious metals is diminishing.
We attribute silver’s outperformance over gold to the increasingly risk-friendly environment. Although silver attracts safe-haven bids at times, it tends to perform better than gold when risk appetite is strong. With risk assets surging thanks to expectations of stronger global growth, investors seem inclined to favour silver in their precious metals portfolios.
Sill, industrial demand for silver could disappoint next year. Trump’s policies are likely to put the EM world under pressure and may hurt industrial demand for silver where most silver demand is concentrated.
Investment and speculative flows:
- Silver ETF holdings – at 20,339 tonnes as of December 8 – are down 83 tonnes or 0.4% so far in December after falling 381 tonnes or 2% in November. Safe-haven demand for silver has weakened noticeably since November due to a surge in risk appetite, in part in response to Trump’s victory.
- Speculative positioning deteriorated for a third straight week over November 22-29 the latest CFTC statistics show. We expect the NLFP to move about 50% lower toward its long-term average of roughly 32,000 contracts, essentially via long liquidation – the gross short leg is at a fairly low level.
Key macro event:
Investors will now shift their focus to the Fed meeting on December 13-14. Investors continue to see a high probability (94.9%) of rate increase. Although the Fed rate increase is discounted by the market, we think that, similar to last year, risk aversion could increase if financial conditions tighten too quickly. In this case, investors could be prompted to rebuild some long positioning across silver (and especially gold) to protect against a pronounced sell-off in equities.
Despite the current rebound in prices, we continue to adopt a negative stance over the very short term, holding the view that the recent strength is merely technical retracement within a downtrend rather than a change in trend. We expect selling pressure to continue until at least the December 13-14 FOMC meeting. A firm break above the 200 DMA would turn us neutral in the very short term.
We have a neutral stance on silver over the short term because we think safe-haven demand could surge at the start of 2017 if the Fed’s decision causes financial conditions to tighten too quickly, triggering profit-taking across risky assets.