Silver stabilises as focus shifts to gold and the dollar
Head of Commodity Strategy
Summary: Silver's Reddit inspired rally has run its course for now with the price retracing most of the gains seen during the past few days. In order for the market to rally, which we believe it eventually will, it has to be based on sound fundamentals and not frenzied buying based on a questionable narrative. The focus now returns to the dollar, gold and to a certain extent copper as the key sources of inspiration.
Silver’s go it alone rally has ended and after failing to break above $30/oz, now a double top, the Reddit trade idea has crumbled. Having corrected by 12% since Monday it has found support at $26.35/oz, the 61.8% retracement of the January low to Monday’s peak.
In our latest update from Monday we highlighted the reasons why we have a long-term positive view on precious metals, led by silver, but also why the rWallStreetBets inspired pump was likely to fail given its incorrect narrative of a large naked short that could be squeezed.
Without strong support from gold which instead has been drifting lower in response to a stronger dollar, the rally was doomed to fail. Not least given the lack of fundamental reasons for the gold-silver ratio (Ticker: XAUXAG) moving to a seven-year low at this point in the cycle. The ratio traded down to 62.35 on Monday before returning to 70, the 10-year average. Whether silver has retraced enough depends on the extent to which recent buyers of silver through exchange-traded funds are more to sell out. Since Thursday and up until yesterday total holdings backed by silver jumped 1,732 tons to a fresh record of 29,900 tons.
While premiums for silver coins and small bars due to strong retail demand has been rising, thereby forcing unfortunate buyers into paying a huge and potentially loss making premium above the prevailing spot, the LBMA in London reported that one billion ounces or 28,350 tons of silver traded in the London spot market on Monday. Despite being triple the level seen in recent months, the LBMA said "throughout this period, the market continued to demonstrate liquidity and durability, and no issues arose impacting either trading, settlement, or the efficiency of the daily price auction."
Having fully retraced the rWallStreetBets on Reddit and #Silversqueeze on Twitter driven surge, the focus now turns to gold and its ability to recover from this week’s stronger dollar-led weakness. So far the yellow metal has managed to defend an area of support around $1825 and while the dollar has created some headwinds, renewed weakness in US 10-year real yields below -1% has provided support.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.