Silver has rebounded strongly since mid-March after finding a reliable level of support at $17 per oz. The metal is now trading above its 20 DMA, its DTL from the 2016 high and the bottom of its ascending channel, which could suggest that a new uptrend is under way. We are therefore constructive over the very short term (around one month).
On the upside, silver needs to take out its 2017 peak to make sure the uptrend will last longer. On the downside, a break below the 20 DMA may produce a negative swing in sentiment and push prices lower toward the UTL.
Silver is consolidating at the start of the week after climbing nearly 3% last week on strengthened inflation expectations due to the run-up of 5.3% in oil prices.
There is increased divergence in the USA between positive soft data (reflecting very friendly sentiment) and more subdued hard data (industrial production, retail sales, housing starts etc.). There is therefore a risk of mean reversion whereby investors could become much less optimistic about President Trump’s reflation narrative, which in turn could trigger strong risk aversion, producing some safe-haven bids for silver provided that investors see the metal as an effective hedge against tail risk.
The environment of super-low volatility has prompted CTAs (i.e. trend followers) and risk parity funds to leverage their portfolios to an extreme. But this is inherently unstable, which could result in a spike in volatility in the near term. Again, some safe-haven bids in favour of silver could ensue.
The coming week will be rich in macroeconomic news flow. Importantly, investors will pay close attention to the release of the March FOMC minutes on April 5 for a better understanding of the Fed’s decision to raise rates last month rather than later last year. This could have strong implications for the dollar and US real rates and thus on silver through a resulting change in spec/ETF positioning.
Investment and speculative flows:
- ETF investors sold 35 tonnes of silver last week after buying about 54 tonnes in the preceding week so perhaps they are not terribly convinced that silver can be an effective safe haven.
- Speculators lifted their net long position for the first time in four weeks over March 21-28, according to the CFTC. This was driven essentially by fresh buying, which is indicative of very positive sentiment.
We turned constructive on silver over the very short term on March 24 at $17.76 per oz. We think that further upward pressure is likely in the near term from friendlier macro forces (i.e. lower dollar, lower US real rates) and potential safe-haven bids should investors turn risk-off in April. A break above the 2017 peak may boost our bullish conviction.
We are slightly negative over the short and medium terms given our view the dollar and US real rates will gradually increase - the coming fiscal stiumulus measures in the USA are likely to prompt the Fed to tighten its policy at a faster pace.
Over the long term, we retain our constructive view because we expect the supply/demand balance to tighten significantly.
For more information, see our February Spotlight.