Silver Should Rebound From Current Levels

Key Insights

• Silver has been losing ground in recent weeks, driven by stronger dollar and higher Treasury yields. 
• Precious metals are trading as if traders expect another rate hike, but the FedWatch Tool indicates that the interest rate will remain unchanged by the end of the year with a 64.8% probability. 
• Gold/silver ratio may decline towards the 78 level as China provides additional support to the economy. 

Silver has found itself under material pressure in recent weeks. Rising Treasury yields, stronger dollar, and the increase in gold/silver ratio pushed silver prices towards the recent lows near $22.20.

At current levels, silver is down by about 13% from yearly highs that were reached back in early May. In my opinion, silver has a good chance to rebound towards yearly highs and move further towards the $30 level.

FedWatch Tool indicates that there is a 64.8% probability that Fed will leave the federal funds rate unchanged by the end of the year. Fed is expected to start cutting rates in May 2024, with a 39.0% probability of a 25 bps rate cut.

Yet, Treasuries and U.S. dollar are moving as if the market prepares for another rate hike. Not surprisingly, a combination of stronger dollar and higher Treasury yields have put material pressure on precious metals, including silver.

It remains to be seen whether Fed can afford another rate hike. While the economy performs better than expected at the start of the year, resession risks remain. If the market realizes that Fed will stop raising rates despite the hawkish rhetoric of the Fed members, the U.S. dollar will start moving lower, providing additional support to precious metals.

The recent increase in gold/silver ratio was triggered by the problems in the Chinese economy, which is an important source of demand for silver. Chinese authorities realize that they have to provide additional stimulus to boost growth. They have already implemented various measures that should have a positive impact on the economy in the upcoming months, boosting industrial demand for silver and pushing the gold/silver ratio towards the July lows near the 78 level.

A combination of weaker dollar and lower gold/silver ratio should provide sufficient support to silver and push it away from recent lows.

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