Silver’s remarkable recovery after its vicious falls during the height of the coronavirus pandemic suggests more gains are on the way due above all to momentum buying. And with gold also breaking out, the grey metal should get some tailwind from the yellow metal.
Both precious metals are finding good support from falling yields amid expectations central banks will keep their respective monetary policy stances extraordinary loose for some time yet, as they try and combat the economic slump caused by the pandemic and reduce deflationary risks. Low and negative interest rates tend to boost the appeal of noninterest-bearing precious metals as investors are forced to look for alternative investments with benchmark bond yields being so low. Then there is haven demand, which has been evidenced for example by sharp inflows into exchange-traded funds that track the prices of precious metals. Indeed, investors bought into the weakness we saw for a few hours on Friday, which then led to a quick recovery before gold ended the day higher and silver flat. Holdings of SPDR Gold Trust rose 0.3% on Friday.
Investors are now wondering whether industrial demand will recover quickly and stay positive in order to keep silver prices supported. As well as jewellery, silver is also widely used in industrial processes compared to gold. For that reason, it is seen by many as both industrial as well as a precious metal. So, with the global economy coming out of lockdown, industrial demand for the grey metal is likely to increase. Assuming the likely increase in physical demand is not outpaced by supply, then silver prices will have to rise to find a new equilibrium. On that front, news of a 6% rebound in Chinese industrial profits is certainly positive as it restores some optimism over the economic recovery. The key risk of course is widespread lockdowns being re-introduced if there is a second wave of COVID-19 infections in parts of the world that have somewhat successfully dealt with the situation, for example Europe. In the US, several states have been forced to undo the easing of restrictions as cases continue to rise. In the event the situation gets out of control, then this will likely be a bearish factor to take into account for all industrial materials, including silver.
But in so far as the short-term outlook is concerned, silver continues to look bullish judging by its recent price action:
Source: TradingView and ThinkMarkets
The metal has been building a base above its rising 21-day exponential moving average, which is always a positive sign. Silver now looks poised for a bullish breakout from its triangle pattern, potentially as early as today. It has been knocking on the door and with the resulting sell-offs being progressively shallower over the past few days, the bearish pressure is apparently weakening which points to a breakout above the bearish trend line of the triangle.
There had been a similar triangle pattern from which silver broke out in early May, resulting in a sharp rally. Could we see another such scenario again? If the breakout does materialise, then the bulls may target the liquidity above the old highs as per the chart i.e. around $19 where the trapped bears’ stops might be resting.
Silver bulls will want to see immediate follow-through now. What they don’t want to see is a move back below and acceptance beneath $17.50 support. Should this happen then then the short-term outlook would become slightly less compelling for the bulls. For the bears, a clean break down below the triangle is needed, given the strength of the current trend.