- The spot price of silver hit a 27-month low of $17.56 on September 1
- Silver is worst performing metal and third worst commodity
- Charts suggest a turnaround from here to $18, but hold will be tenuous
The believers of silver just can’t seem to catch a break after spending four of the past five months in the red. The first session of September itself delivered a 27-month low for the industrial metal also branded as precious.
Both spot silver and silver futures are in bear market territory now, their 24% stumble on the year exceeding the minimum 20% drop from a recent high that a market needs to be to fit into that category.
Besides that, silver is also the worst performing metal for the year and the third worst performing commodity after lumber (-56% ) and oats (45%).
Charts by skcharting.com with data powered by Investing.com
One reason silver is having such a terrible year is because of the weakness in gold, which translates to a lack of a safe haven attraction for precious metals now versus the dollar and yields on 10-year US Treasuries.
This dynamic has worsened since the Federal Reserve’s interest rate hikes, which began in March, became more aggressive as the central bank attempts to fight back inflation raging at four-decade highs.
The Fed’s rate hikes have also triggered fears that the US economy will be dragged into a deeper recession in the coming months. As silver is largely an industrial metal, it suffers from any recession threat, which might include a slowdown in the job market.
Silver’s tumble on Thursday to a 27-month low of $17.56 per ounce came ahead of the US August jobs report due today. The Fed is keeping a close watch on labor data to gauge how much tolerance the job market will have toward higher interest rates.
Economists think the United States added some 300,000 jobs in August holding the unemployment rate steady at 3.5% for a second straight month. A jobless rate of 4% or below is seen by the Fed as full employment.
Unemployment among Americans reached a record-high rate of 14.8% in April 2020, with the loss of some 20 million jobs after the COVID-19 breakout. Since then, hundreds of thousands of jobs have been added every month, with the trend not letting up in July despite a negative 0.6% growth in second-quarter gross domestic product this year, after a minus 1.6% in the first quarter that together accounted for a recession.
US inflation itself has been running at around four-decade highs since late last year, although the closely-watched Consumer Price Index slowed to an annualized rate of 8.5% in July from a peak of 9.1% in June.
The Fed’s target for inflation is a mere 2% a year and it has vowed to raise interest rates as much as necessary to achieve that. Rate hikes are anathema particularly to gold, which some of the biggest investors buy as a hedge against inflation.
So silver is getting screwed on both ends: first as an industrial metal impacted by recession fears and secondly as a precious metal that doesn’t have an attractive safe-haven proposition now.
Christopher Lewis, who blogs on precious metals at FXEmpire, said the forecast for silver “continues to look horrible.” Adding:
“A bounce from here could be an opportunity for short-term buyers, but I just don’t see how the trend changes with the strengthening US dollar.
“Remember, the US dollar tends to move in a negative correlation to the silver market, so you need to be aware of the fact that the US Dollar Index is something that you should be paying close attention to, as well as interest rates in America as they can drive the currency higher.”
“Ultimately, this is a market that I would rather fade rallies given an opportunity, but we will have to wait and see whether or not we get that possibility.”
Since its March peak of above $26 an ounce that came on the back of the big commodities rally triggered by Russia’s invasion of Ukraine, silver has slid steadily in five of the past six months. It lost 8% in April, 5% in May, 6% in June, nearly 12 % in July and 0.2% so far for August.
Uncertainty in industrial demand for silver amid growing fears of a recession in the United States is responsible for much of that.
More than 50% of silver’s demand originates from industrial use. As a malleable metal, it is just as good as gold for jewelry making. It is also a good conductor of electricity, and used extensively in the manufacture of electronic components.
The transition to clean energy had also been expected to drive physical demand for silver, particularly for connections in electric vehicles and for components within solar panels. The rollout of fifth generation (5G) telecom networks was seen as another substantial source of demand.
So is $17.56 the bottom now for silver? Or will it descend deeper into the abyss?
Sunil Kumar Dixit, chief technical strategist at SKCharting.com, says the spot price of silver could bounce back in the near—term to $19.
“On the surface, silver has been trading below an ascending $2 height channel that targets a further drop to $16.90."
“But there’s also a positive overlap in the oversold Daily Stochastics of 11/7 that may cause a short-term recovery to $18.16 -$18.66 -$18.96.”
“Then again, this recovery may fizzle out if bears find it vulnerable again at the test of $18.96 and $19.44 swing high.”
Dixit added that renewed selling could also push silver below $16.
“If momentum continues to be bearish, we expect a drop to $15.58, which is a 78.6% Fibonacci retracement of silver’s previous upswing from $11.64 to $30.075.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.