Silver Set to Bottom Amid Changing Economic Conditions

This article discusses the technical analysis of the spot silver market and the current economic indicators that could impact it. The analysis finds that silver prices are approaching a critical bottom, as indicated by channel support. This bottom is reinforced by a strong long-term outlook and dollar weakness, suggesting that it could lead to a significant rally in the silver market.

Silver on the Verge of a Major Bottom

Silver has reached a strong support level in 2024, as indicated by the critical support area visible in the daily chart below. This critical support is highlighted by the blue channel lines in the chart. The red dotted line below this channel forms a descending broadening wedge formation.

The intersection of the red dotted trend line and the blue trend line marks this junction as the critical support area. This area is likely to represent a long-term bottom in silver prices and could initiate a strong rally. The key reversal observed on Thursday is also a clue that this strong rally in silver prices may be starting.

This strong bottom on the daily chart also indicates that silver has completed its seasonal correction and is starting a strong rally higher. According to the quarterly chart below, the significant price fluctuations from 1982 to 2003 resulted in a strong breakout in Q1 2004.

This breakout was retested in Q2 2024, initiating a strong price surge from 2004 that led to record highs of around $50 in 2011. These record highs triggered another price correction from 2011 to 2020. After this correction, the price broke the long-term trend line in a manner similar to the breakout in Q1 2004. This breakout initiated a strong price surge in Q2 and Q3 of 2020.

The quarterly chart shows that the breakout and retest of silver prices are following a similar pattern. Therefore, silver prices are already in a surge mode and are likely to move higher. The first target of this price surge is $50. The strong quarterly candle for Q2 2024 suggests that any correction in August will be considered a strong buying opportunity for the next few months.

The patterns on the quarterly chart also show that silver is likely to break above $50 and initiate a strong price surge in the coming years. This is also validated by the discussion of the cup and handle formation on the yearly chart in the previous article, which points to strong price moves in the next few years for the silver market.

Examining Silver’s Bottom Through the Gold-to-Silver Ratio

The gold-to-silver ratio has reached a significant area of resistance, indicating that a bottom in silver is approaching. However, this resistance level in the ratio must hold for the bottom to be confirmed. The gold-to-silver ratio is a key indicator of the relative value between gold and silver, with peaks in this ratio signalling that silver is undervalued compared to gold.

When the ratio reaches a peak, it typically indicates that gold has significantly outperformed silver, leading to a potential bottom in silver prices. Historically, these peaks are followed by a reversal, where silver begins to outperform gold, resulting in a strong rally in silver prices. Therefore, a peak in the gold-to-silver ratio can be seen as a signal that silver is poised for a rebound, marking a potential bottom and an opportunity for investors to capitalize on the expected upward movement in silver.

The chart below illustrates the recent bottoms in silver prices that occurred when the gold-to-silver ratio peaked. One strong bottom in silver was observed in August 2022, and the second was in February 2024. These two bottoms in silver coincided with peaks in the gold-to-silver ratio. Currently, the ratio is approaching the resistance of the same trendline that has historically signalled a bottom in silver prices.

The Impact of Monetary Easing and Dollar Weakness on Silver

The current financial environment is marked by steady liquidity in the markets and a decline in the Chicago Fed Financial Conditions Index to -0.546, as shown in the chart below. This indicates that monetary easing is on the horizon. This scenario benefits silver as lower interest rates and increased liquidity make precious metals more attractive as safe-haven assets.

As monetary conditions ease, investors often seek to hedge against potential inflationary pressures and currency depreciation, driving demand for silver. This demand can lead to upward pressure on silver prices, especially in an environment where financial markets expect continued monetary accommodation from the Federal Reserve.

Moreover, the slight decline in the trend of commercial bank reserves at the Federal Reserve suggests a tightening in liquidity. This could indicate that the Fed is cautiously managing the monetary base. However, this cautious approach is likely to be outweighed by the broader expectations of significant rate cuts later in the year.

With the CME FedWatch tool indicating a strong possibility of a 50 basis points rate cut in September and a total of 100 basis points reduction by year-end, the overall impact on silver prices could be bullish. Lower interest rates reduce the opportunity cost of holding silver and make it more attractive for investors looking for alternatives to cash and bonds.

On the other hand, the labor market data on Thursday, showing lower-than-expected initial jobless claims, complicates the Fed’s decision-making process. This uncertainty is contributing to market participants increasingly pricing in rate cuts and the possibility of prolonged low interest rates. As a result, silver prices could experience sustained upward momentum, reflecting its role as a hedge and as a beneficiary of a weakening dollar and declining real yields.

This trend is further reinforced by the weakness in the US Dollar Index (DXY) over the past few weeks, which has been trading within a triangle pattern, as shown in the chart below. The dollar index has generally been bearish, as indicated by the development of bearish patterns. However, the index must drop below 101 to sustain its downward momentum. Additionally, the decline in US Treasury yields adds further support for silver prices.

As the dollar weakens and bond yields fall, silver, priced in dollars, becomes cheaper for foreign investors, potentially increasing global demand. The drop in bond yields also reduces the appeal of fixed-income investments, leading investors to shift towards precious metals, which are traditionally viewed as a store of value during times of financial uncertainty. This dynamic is likely to bolster silver prices further, especially if the dollar continues its downward trend.

Risks Analysis

While silver appears to be on the verge of a significant bottom, several market risks could impede the expected rally. One of the primary risks is economic uncertainty, where stronger-than-expected global economic growth or sudden financial instability could alter the demand dynamics for silver.

Additionally, if the Federal Reserve decided to raise interest rates instead of implementing the expected cuts, the appeal of silver could diminish, leading to downward pressure on prices. Furthermore, a sudden rebound in the US Dollar could make silver more expensive for foreign investors, reducing global demand and potentially triggering a decline in prices.

Another significant risk lies in the potential reversal of the gold-to-silver ratio. The current expectation is that the ratio’s resistance level will hold, signalling a bottom in silver prices. However, if this resistance fails and the ratio continues to trade higher, the expected rebound in silver may be delayed. Additionally, lower-than-expected inflation could diminish the need for silver as an inflation hedge, limiting its upward momentum despite favourable technical indicators.

Finally, market sentiment and geopolitical factors also pose risks to silver’s rally. If investor sentiment shifts towards risk assets, particularly if equity markets perform well, the flow of investment into safe-haven assets could decrease. Improved geopolitical stability could further reduce the demand for silver as a protective asset, potentially stalling the expected price surge. These factors underscore the importance of closely monitoring broader market conditions, as they could significantly impact silver’s trajectory despite the positive technical outlook.

Conclusion

In conclusion, silver is turning from the pivotal point, with multiple factors aligning to suggest that a significant bottom is forming. The combination of strong technical support, historical bullish price patterns, and a weakening US Dollar creates a favourable backdrop for a potential rally in silver prices.

Additionally, broader economic conditions, including expected monetary easing and declining bond yields, are likely to enhance silver’s appeal as a safe-haven asset. As these dynamics play out, silver is positioned to potentially experience sustained upward momentum, making it an attractive investment opportunity. The spot silver market has strong support at the $26.90 and $25 levels, making it attractive for long-term investment potential.