Silver stabilises as focus shifts to gold and the dollar

Ole Hansen

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.

Source: Saxo Group

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.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
Most of our staff in Singapore are working from home to help limit the spread of the coronavirus. We remain at your service on the details below. Thank you for your understanding.

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.