Switch at Multi-Month Trend Support – Levels for XAG/USD

Silver Price Outlook:

• Silver prices are poised to return below the downtrend of the April and August highs.
• Even though the US Dollar (via the DXY Index) has retreated in recent days, high US yields (both nominal and real) are hampering silver prices.
• RRecent changes in sentiment suggest that silver prices have a mixed bias.

One more uphill climb

Silver prices are treading water after rebounding at the start of the week, but are finding no meaningful follow-up. The fundamental backdrop remains challenging, with the odds of a Fed rate hike increasing, suggesting a higher terminal rate in 2023 than expected at the start of the month. US Treasury yields continue to rise, helping to keep US real yields supported across the curve. As long as US real yields remain high, hopes of a sustained rally in silver prices are dimmed, and further declines are possible.

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. Market volatility has eased, leaving silver prices adrift.

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 +0.19 and the 20-day correlation is -0.13. A week ago, on October 11, the 5-day correlation was -0.07 and the 20-day correlation was -0.62.

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

Silver prices maintain a bearish technical structure. The dynamic remains oriented downwards. Silver prices are below their daily envelope of 5, 8, 13, and 21 EMA, which is in bearish sequential order. The daily MACD has issued a bearish cross and is falling below its signal line, while the daily Slow Stochastics are entering oversold territory. As stated last week“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 (from November 2010 to October 2022) (CHART 3)

Nothing has changed in recent days, as “there is a delineation between a bullish or bearish longer-term outlook (at) 21.4500/21.6800, and a move back above this range would suggest that the break down of 2022 has failed, and therefore a more constructive outlook – until 2023 – would be appropriate, [but] it never happened. As a result, the bearish breakout remains the main push, suggesting that greater weakness may be on the way before the ultimate low is found.

IG CUSTOMER SENTIMENT INDEX: SILVER PRICE FORECAST (October 18, 2022) (CHART 4)

Silver: Retail trader data shows that 94.80% of traders are net long with a ratio of long to short traders of 18.22 to 1. The number of net long traders is 3.02% higher than silver. yesterday and 36.31% lower than last week, while the number of net-short traders is 6.61% higher than yesterday and 47.13% lower than last week.

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

Positioning is less net-long than yesterday but net-long 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