Silver could be gearing up for a 2019 rally

Gold has settled into a relatively tight range as traders await further inspiration from the direction of the dollar, stocks and bonds. From a short-term perspective, the most important market mover is likely to be next week’s Federal Open Market Committee meeting. Not least considering the emerging speculation that the Federal Reserve may adopt a one-and-done strategy, i.e. signalling a pause in further rate hikes while they await further economic data.

Silver, meanwhile, currently down by 13% on the year has been showing some emerging signs of strength. While the price from a technical perspective has yet to break any significant level, it has managed to move higher in recent days, both against the dollar but also against gold. Silver’s current downtrend has been underway since July 2016 when it hit $21/oz. But in fact looking further back it began in 2011 when it almost reached $50/oz. In the run up to the peak in May that year silver had spiked higher by 175%  in response to a speculative buying frenzy driven by surging industrial metal and gold prices. Industrial metals in response to increased Chinese stimulus as the government increased its effort to support its economy and gold as the world became increasingly worried about the impact on the dollar and the financial system from quantitative easing. 

Fast forward to today and silver has now for several months been trading in a range between $14 and $15/oz. During this time two attempts to take it lower towards the 2015 low at $13.65/oz have been rejected. The move higher yesterday provided us with the first signs of an emerging breakout. In order for that become a reality, however, it needs to take out $15/oz followed by $15.19/oz, the 2017 low. 

We have a positive view on gold into 2019 and with the gold-silver ratio at a multi-year extremes we see the potential for the white metal outperforming gold. Any pick-up in demand for industrial metals, especially through additional Chinese stimulus measures would provide silver with an additional layer of leverage.