Silver (XAG) Forecast: Gold Divergence Widens; Is Silver Undervalued or Overextended?

Silver’s Turbulent Week: Divergence from Gold and Technical Breakdown

Silver prices experienced a tumultuous week, marked by a significant divergence from gold’s performance and a notable technical breakdown. While gold reached new all-time highs, silver struggled to gain traction, highlighting the complex factors influencing the white metal’s market behavior.

Last week, XAG/USD settled at $29.22, down $1.56 or -5.08%.

Gold-Silver Ratio Widens

The stark contrast between gold and silver’s performance was a key feature of the week. As gold surged to record levels, silver’s lackluster response puzzled many traders. This divergence pushed the gold-silver ratio higher, suggesting potential undervaluation of silver or overvaluation of gold.

Dollar Strength and Yield Pressure

A strengthening U.S. dollar and rising Treasury yields played crucial roles in pressuring silver prices. The dollar’s rise makes silver more expensive for foreign buyers, while higher yields increase the opportunity cost of holding non-yielding assets like precious metals.

Industrial Demand Concerns

Unlike gold, silver’s significant industrial applications make it vulnerable to economic slowdown fears. Weak manufacturing data from China, a key metals consumer, raised concerns about future demand. This industrial aspect of silver contributed to its underperformance compared to gold throughout the week.

ETF Flows Favor Gold

Institutional investors showed a clear preference for gold over silver this week. Gold ETFs reported substantial inflows, while silver struggled to attract similar interest. This shift in speculative capital further widened the performance gap between the two metals.

Fed Rate Cut Expectations

Market expectations for Federal Reserve interest rate cuts have been a key driver of precious metals’ recent performance. However, the high certainty of a September rate cut (98% probability according to CME FedWatch) may have created a “buy the rumor, sell the fact” scenario, potentially trapping late buyers in silver and gold.

Technical Breakdown

Silver’s break below the 50-day moving average at $30.19 signaled a significant technical breakdown. This level now serves as resistance, with sellers potentially targeting the recent bottom at $28.57. A failure to hold this support could trigger an even steeper decline, with the next target zone between $27.22 and $26.60.

Profit-Taking and Overextension

The recent sharp decline in silver prices may also be attributed to profit-taking following the metal’s strong rally earlier in the year. Some analysts suggest that silver had become overextended and was due for a correction, especially given its underperformance relative to gold.

Physical Demand Softens

On the physical side, Asian gold and silver demand was sluggish this week. Customers showed reluctance to make new purchases despite deep discounts, instead capitalizing on record-high bullion prices by selling existing holdings.

Forecast: Caution Amid Volatility

Looking ahead, silver’s short-term outlook remains cautious. The technical breakdown and divergence from gold signal potential further weakness. Traders should closely monitor the crucial support at $28.57. A breach of this level could accelerate selling pressure, potentially pushing prices towards the $27.22 to $26.60 zone.

However, the medium-term outlook maintains a glimmer of optimism. Citi Research’s forecast of $38 silver over the next 6-12 months underscores the potential for significant gains, provided economic conditions improve and industrial demand recovers.

Investors should keep a close eye on upcoming economic indicators like Friday’s PCE inflation data, Fed communications, and the interplay between industrial demand and safe-haven appeal. These factors will be pivotal in determining whether silver can regain its footing or if further downside is in store.