Silver Price Forecast: Hanging On To The Downtrend Ahead Of The FOMC

Silver Price Outlook:

• Silver prices are holding a multi-month descending trendline ahead of tomorrow’s September Fed meeting.
• A move above the trendline increases the likelihood of a return to the September high, while a drop will increase the possibility of a return to the yearly low.
• RRecent changes in sentiment suggest that silver prices have a mixed bias.

Waiting for Powell

Like most other assets this week, silver prices saw moderate price action ahead of the September Fed meeting. Questions remain over whether or not Fed Chairman Jerome Powell and the FOMC will offer a 75 or 100 basis point rate hike, although both scenarios are likely to catalyze a significant market reaction in their wake. If the Fed only delivers 75 basis points, there is a chance for a short-term rally in silver prices; if the Fed provides 100 basis points, silver prices could quickly collapse. Either way, silver prices are hanging onto a descending trend line for several months ahead of the September Fed meeting, and resolution around this key technical area will guide the direction of trade for the rest of this week.

Silver Prices and Volatility Relationship Strengthen

Both gold and silver are precious metals that generally enjoy safe-haven appeal during times of financial market uncertainty. While other asset classes dislike increased volatility (signalling greater uncertainty around cash flow, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility, as uncertainty increases the attractiveness of silver as a safe haven. The recent increase in US stock market volatility could help silver prices avoid a bigger decline in the near term.

VIX (US S&P 500 VOLATILITY) vs Silver Price

US stock market volatility (as measured by the S&P 500 US Volatility Index, VIX, which tracks stock market volatility expectations based on options on the S&P 500 Index) was trading at 26.51 at time of writing this report. The 5-day correlation between the VIX and silver prices is +0.50 and the 20-day correlation is +0.30. A week ago, on September 13, the 5-day correlation was -0.45 and the 20-day correlation was -0.05.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 2)

After setting a new yearly low at 17.5590 on the first day of September, silver prices quickly rebounded off the descending trend line from the April and August highs. Hanging on to last week’s downtrend, silver prices are still below a group of important Fibonacci levels – the 23.6% retracement of the 2011 high/2020 low range; and the 50% retracement of the 2020 low/2021 high range – while holding above the 61.8% retracement of the 2020 low/2021 high range.

The dynamic has improved in recent days. Silver prices are above their daily envelope of 5, 8, 13 and 21 EMA, which is in a bullish sequential order. The daily MACD is approaching a bullish crossover through its signal line, while the daily Slow Stochastic is holding just below overbought territory. A rally after the September Fed meeting could see silver prices return to their monthly high at 20.0140; weakness in the wake of the FOMC could produce a drop below the multi-month descending trendline, paving the way for a return to the yearly low at 17.5590.

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (from November 2010 to September 2022) (CHART 3)

Despite the recent rebound, there is an argument to be made that the longer-term outlook remains bearish. With the price of silver having broken the 61.8% Fibonacci retracement of the 2020 low/2021 high range at 18.7064, the bull run in 2020 and 2021 is still over. Silver prices are still below their weekly EMAs of 4, 8, and 13, and the EMA envelope is aligned in a bearish sequential order. The weekly MACD has just started to rise but remains below its signal line, while the weekly slow stochastic is still below its middle line. From a weekly perspective, as it currently stands, silver prices remain in “sell the rally” mode.

IG CUSTOMER SENTIMENT INDEX: SILVER PRICE FORECAST (September 20, 2022) (CHART 4)

Silver: Retail trader data shows that 84.74% of traders are net long with a ratio of long to short traders of 5.55 to 1. The number of net long traders is 1.00% higher than silver. yesterday and 5.50% lower than last week, while the number of net-short traders is 0.91% lower than yesterday and 64.00% higher than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that silver prices may continue to decline.

Positioning is longer than yesterday but shorter since last week. The combination of current sentiment and recent shifts gives us another mixed bias for silver trading.

— Written by Christopher Vecchio, CFA, Senior Strategist