- Silver remain under pressure following last week’s sharp sell-off.
- Prices are currently testing recent support found around $17.65 per oz.
- The stochastics imply short-term sentiment has weakened.
- Nearby support is seen from the 40 DMA at $17.58 per oz while stronger support is expected around $17.20 where the 55 & 100 DMAs have converged.
- There are two short-term MAs poised to cross above longer-term MAs, which indicates silver could be entering a bull market.
- Successful clearance of DTL resistance from the July 2016 high would target resistance towards the November high of $18.98 per oz.
US monetary policy will continue to dominate ahead of the March 15 FOMC meeting. Markets have clearly reacted to recent hawkish rhetoric from Fed official, with the CME Fedwatch tool now pricing an 84% probability of a March rate rise compared, up from below 30% in the previous week.
The AU/AG ratio has turned higher since last week’s correction, which signals short-term risk aversion. But the ratio remains below the reading of 72.1 from the start of the year, reflecting the overall strength of industrial commodities.
Net length among Comex speculators rose a further 7,406 contracts or 8% in the week to February 28. It has climbed consistently this year and is up by 36,512 tonnes or 62% so far in 2017. We expect the net length to rise alongside prices amid higher risk aversion. Still, we continue to think that the pace of net long accumulation will slow compared with gold because silver tends to have a higher correlation with risk assets.
Investment demand has proven mixed recently:
- ETF holdings stand at 644.8 million oz (basis the funds we monitor) following recent liquidation from the US-listed iShare platform. But holdings stand just 4.4% below their all-time record of 674.4 million oz, reflecting the bullish long-term outlook among investors.
- But higher prices have had a negative impact on retail investment demand. American Eagle coin sales totalled 1.25 million oz in February, down from 5.12 million oz in January. Accumulated sales were down 40% year-on-year in the first two months of 2017.
Industrial demand appears robust. Silver demand from the photovoltaics industry will rise 11% this year to a record high of 83.3 million oz, according to the latest Interim Silver Market Review from GFMS. Silver demand from ethylene oxide producers is set to remain flat this year at 10.2 million oz after demand doubled last year. But this will be offset by weaker jewellery fabrication demand, which is forecast to drop 8% this year, and from a drop in physical coin and bar sales. Total silver supply is seen falling 3% to 1.0124 billion oz due to reduced output from lead/zinc and gold mines.
Global mine production declined by 5.8% in 2016, according to the latest estimates by the WBMS. We expect a modest expansion of mine production in 2017. Expansion projects at Fresnillo and Pan American Silver should support production growth in Latin America. Higher production is expected from the Cannington mine; additional output is expected from small and mid-tier base metal producers, particularly with exposure to zinc, that restart shuttered mines and boost output to capitalise on the current price strength.
We maintain our view that silver will remain vulnerable to pressure in the short term after the recent test above DTL resistance formed from the July 2016 failed to generate follow-through momentum. But the fact the recent correction has encountered dip-buying indicates sentiment remains bullish overall and that prices will resume an upwards bias once the current consolidation phase is complete.