SILVER TODAY: Focus on US jobs data

Technical drivers
Silver has rebounded since hitting a 2017 low earlier in July. Silver is now above its 20 DMA, a sign of positive momentum, although below its 200 DMA is resistance that could be tough to overcome.

We are constructive on silver over the very short term, a view that we opened on July 12 at $15.89 per oz to play a tactical rebound in an oversold environment. Our stop/loss is at the 2017 low.

Momentum-based indicators
Momentum is positive while the ADX is above 20, implying a strong uptrend.

Macro and micro drivers
Silver managed to rebound yesterday alongside gold when slightly disappointing US macro data was sufficient to weaken the dollar and pressure US real rates lower. But silver remains about flat on the week amid weaker safe-haven flows and a strong risk-on mood earlier this week.

The VIX remains at an extremely low level, pointing to extensive complacency across financial markets. While this may continue for longer, the recent hawkishness among major central banks may trigger a spike in volatility via tighter global financial conditions. In this case, a powerful wave of safe-haven buying may ensue.

Today, investors will scrutinize the US jobs report for July, which could have meaningful implications for the trajectory of Federal Reserve tightening. With the market currently pricing in only a 50% probability for another rate Fed rate increase by year-end, stronger US jobs numbers (especially on the wages side) could trigger a hawkish Fed repricing, which in turn could push the dollar and US real rates higher. This would be negative for silver.

Investment and speculative flows
Silver ETF investors have sold about 123 tonnes of silver this week after 125 tonnes in last week.

Speculators lifted their net long fund position (NLFP) massively for the first time in seven weeks over July 18-25, according to the Commodities Futures Trading Commission, mainly via short-covering. This confirms our intuition that a powerful bout of short-covering was ineluctable amid overly bearish positioning.

Conclusion
We are positive on silver over the very short term to play a technical rather than a fundamental rebound. We see some upside potential while the excessively bearish speculative positioning is in the process of being normalised. But today is likely to result in stronger volatility in the silver market.

We are constructive over the next three and six months because we expect strong safe-haven buying in the coming month and fading risk appetite because of the Fed’s determination to tighten financial conditions despite slower growth.

We remain positive over the longer term because we expect silver to play a growing role in the diversification of portfolios because of its safe-haven characteristics.

Please see our Silver spotlight for June for more details.