Silver to Maintain an Upward Trend with Strong Technical Support

This article provides an update to the previous discussion on the current market developments in the silver market. It has been observed that Silver has bottomed at the identified support junction and is now looking towards higher levels. However, mixed global demand signals and geopolitical tensions add uncertainty, keeping the market alert for potential risks that could increase the volatility in financial markets.

Recap

In a previous article, the fundamental conditions were analyzed, highlighting that the financial landscape is characterized by a mix of easing monetary conditions and a cautious approach by the Federal Reserve. The decline in the Chicago Fed Financial Conditions Index and expectations of significant rate cuts by year-end suggest a favorable environment for Silver.

The weakening U.S. Dollar Index and declining Treasury yields further enhance Silver’s appeal as a safe-haven asset. These factors collectively support the potential for sustained upward momentum in silver prices as investors seek to hedge against inflation and currency depreciation during low interest rates.

The technical analysis section discussed that Silver reached a significant support level in 2024, marked by a descending broadening wedge formation on the daily chart. The consolidation of silver prices within this support region indicated the potential for a long-term bottom and the initiation of a strong rally. The intersection of key trend lines at this critical support area suggests a seasonal correction’s end and an upward surge’s beginning.

It was concluded that with silver prices already in surge mode, the first target is $50, and any near-term corrections are expected to be strong buying opportunities, supported by patterns indicating further gains in the coming years. Moreover, the gold-to-silver ratio also hit resistance, indicating a potentially strong move in Silver. The chart from the previous article is shown below.

Recent Market Trends

Silver has confirmed the bottom and rebounded from the strong support area identified in the previous article. Currently prices are gaining momentum ahead of Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium. Market participants are eagerly awaiting Powell’s remarks, especially any indications of potential interest rate cuts. Recent optimism from Federal Reserve officials, including Boston Fed President Susan Collins and Kansas City Fed President Jeff Schmid, has fueled speculation about a possible rate reduction in September.

The CME FedWatch tool now reflects a 73.5% probability of a 25 basis point cut, signaling that market expectations are increasingly leaning towards monetary easing. Such a scenario typically benefits non-yielding assets like Silver, as lower interest rates reduce the opportunity cost of holding these assets, making them more attractive to investors.

However, the global demand for Silver is facing mixed signals. While geopolitical tensions, such as the ongoing deadlock between Israel and Hamas, could bolster Silver’s appeal as a safe-haven asset, the recent industrial output data from China presents a challenge. As the world’s largest manufacturing hub, China’s economic struggles, highlighted by weak industrial production figures, could dampen demand for Silver, which is heavily used in industrial applications. The fluctuating industrial demand creates an uncertainty for Silver during the supporting market environment.

The technical outlook for Silver is strongly bullish, as shown in the chart below. Prices have rebounded from the identified support region and are now moving towards $30.50, the initial resistance at the blue trend line. It is noted that Thursday’s decline in silver prices tested the red trend lines, which marked strong support, and prices are now moving towards the initial target of this rebound. The rebound from this critical junction suggests that a break above $30.50 may trigger a strong rally towards $50.

To further understand the silver outlook, the chart below presents prices on shorter time frames. The red trend line observed in the daily chart is also seen on the 4-hour chart, and it is clear that Thursday’s drop in prices successfully hit strong support, initiating another short-term buy signal targeting the $30.50 level. This target is defined by the descending broadening wedge pattern on the daily chart. The blue arcs indicate that when prices bottom before the next move higher, they form a double bottom at the lows, which is referred to as bullish price action and suggests higher prices ahead.

Long-Term Bullish Formation in Silver Market

The silver market is forming a strong bullish outlook on a long-term scale, as shown in the weekly chart below. It was found that the consolidation from August 2021 to January 2022 formed the left shoulder of this pattern around $21, while the head was formed during the July 2022 to October 2022 consolidation around $18. On the other hand, the right shoulder was formed during the period from June 2023 to December 2023 around $22. These patterns have a blue neckline around the $26-$27 area, and prices surged strongly once this neckline was broken. This breakout took silver prices to much higher levels and initiated a strong surge potential in the silver market on a long-term scale.

The quarterly chart discussed in the previous article shows that the consolidation does not weaken the prices, and they are on their way towards $50. Once silver prices broke above $26.50, they skyrocketed and formed another bullish price action on the long-term scale. The prices are now showing a bull flag pattern on the weekly chart. This bull flag pattern is similar to the descending broadening wedge pattern observed on the daily chart above. The recent decline in silver prices towards $26.50 occurred exactly at the breakout area, and this support also coincided with the bull flag support, making this junction an important support level for a strong rally to $50.

Mark Risks for Silver

Despite the favorable conditions supporting Silver’s bullish outlook, several market risks could impact its trajectory. Firstly, the anticipation of Federal Reserve interest rate cuts, while generally positive for Silver, carries inherent uncertainty. If the Fed chooses a more hawkish stance than expected, or inflation data prompts a reconsideration of the rate cuts, the current momentum in Silver could falter. An unexpected tightening of monetary policy would likely strengthen the U.S. dollar and increase Treasury yields, which could diminish Silver’s appeal as a safe-haven asset, leading to potential downside risks.

Another significant risk lies in global demand fluctuations, particularly from industrial sectors. While silver benefits from its dual role as an industrial metal and a store of value, weak economic data from key manufacturing regions like China poses a risk to Silver’s industrial demand. China’s recent struggles with low industrial output and broader economic challenges could lead to reduced consumption of Silver for industrial purposes. If this trend continues, it may offset some gains driven by investment demand, potentially leading to a more volatile price environment.

Moreover, geopolitical uncertainties often support safe-haven assets but can also introduce market risks. The ongoing conflicts and tensions could lead to sudden spikes in market volatility. These events can create unpredictable trading conditions, where short-term price movements may not align with long-term fundamentals. Moreover, if geopolitical tensions ease unexpectedly, the safe-haven demand for Silver could diminish rapidly, leading to a potential price reversal. These factors underline the need for cautious optimism, as external events can significantly impact Silver’s bullish outlook.

Conclusion

In conclusion, while the fundamental and technical analysis suggests a strong bullish outlook for Silver, with potential targets as high as $50, several market risks could impact this trajectory. Uncertainty surrounding Federal Reserve interest rate decisions, fluctuations in global industrial demand, particularly from China, and geopolitical developments pose potential challenges. Investors should remain cautiously optimistic, as external factors could introduce volatility and influence Silver’s long-term bullish momentum. From a technical perspective, the initial target of the current silver rally is $30.50, and a break above this level could push prices toward $32.50.