Silver Price Forecast: October Rally Is Erased

Silver Price Outlook:

Back to square one

Last week, on the heels of an impressive start in early October premised “that the Federal Reserve will soon signal that it intends to slow the pace of its rate hikes, culminating in a ‘pause’ in beginning of 2023,” it was noted that “no Fed official has actually made the case for a pause, nor has U.S. inflation data been reported significantly enough to really warrant the jubilant narrative that the end of the Fed’s rate hike cycle is approaching… it’s reasonable to throw some scatter on the notion of a sustained rally moving forward.

The naysayers have been right so far, as the rally in silver prices at the start of the month has now been erased: silver prices are down more than -11% from their high of last week. It stands to reason that precious metals markets are likely to remain volatile for the foreseeable future, especially with the September US inflation report on Thursdaywhich has a chance of triggering a further rise in US real yields (to which silver prices are negatively correlated).

Silver Price and Inverse Volatility Relationship

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. However, this may not be one of those times: the heightened volatility in the US stock market is linked to the belief that the Fed will continue its path of rate hikes for the foreseeable future, which is detrimental to prices. money.

VIX (US S&P 500 VOLATILITY) versus silver price TECHNICAL ANALYSIS: DAILY PRICE CHART (October 2021 to October 2022) (CHART 1)

US stock market volatility (as measured by the S&P 500 US Volatility Index, VIX, which tracks stock market volatility expectations based on S&P 500 index options) was trading at 33.62 at the time of writing this report. The 5-day correlation between the VIX and silver prices is +0.51 and the 20-day correlation is -0.58. A week ago, on October 5, the 5-day correlation was -0.51 and the 20-day correlation was -0.59.

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

In the previous update, it was noted that “the rally ended at a familiar moment: August high at 20.8435; and the area around a cluster of Fibonacci levels, the 23.6% retracement of the 2011/2020 high range and the 50% retracement of the 2020/2021 low range between 20.6500/20.8888 . This turned out to be significant resistance as silver prices failed to advance further and began their aggressive retracement immediately afterwards.

Momentum turned bearish quickly. Silver prices are below their daily envelope of 5, 8, 13 and 21 EMA, which is not yet in bearish sequential order. The daily MACD has issued a bearish cross and is approaching its signal line, while the daily Slow Stochastics have fallen below their middle line. Ultimately, a return below the downtrend of the April (yearly high) and August highs would suggest that the upside breakout has truly failed, and a return to the yearly low at 17.5590 could be on the bridge. .

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

As noted last week that there is a “delineation between a longer term bullish or bearish outlook (at) 21.4500/21.6800” and “a return above this range would suggest that the 2022 downside breakout has failed, and therefore a more constructive outlook – through 2023 – would be appropriate,” this never happened. not be found.

IG CUSTOMER SENTIMENT INDEX: SILVER PRICE FORECAST (October 12, 2022) (CHART 4)

Silver: Retail trader data shows that 90.56% of traders are net long with a ratio of long to short traders of 9.60 to 1. The number of net long traders is 21.35% higher than that of yesterday and 30.18% higher than last week, while the number of net-short traders is 10.66% lower than yesterday and 25.09% lower 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.

Traders are sharper than yesterday and last week, and the combination of current sentiment and recent shifts gives us a bearish contrarian trading bias for stronger silver.

— Written by Christopher Vecchio, CFA, Senior Strategist