Analysis
Silver has broken again below its 50 DMA and 20 DMA after facing strong resistance at $20. Still, the precious metal could find some support at its 100 DMA, which has proven reliable since the downtrend from the 2016 peak. Over the longer term, as long as the 200 DMA is not breached, the technical outlook remains healthy.
On the upside, silver needs to move above its 20 DMA and, more importantly, $20 to make sure that the downtrend has ended. On the downside, the break below the 20 DMA could result in additional selling pressure first toward the 100 DMA and then the 200 DMA.
Macro drivers
Silver is under selling pressure this week after rallying roughly four percent last week amid a broad-based rebound in precious metals thanks to a dovish Fed. A stronger dollar and higher US real rates, exacerbated by broad-based selling pressure in the complex have weighed on the metal since Monday this week, perhaps partly in response to the first of the three TV debates between US presidential candidates Hillary Clinton and Donald Trump Monday perhaps Trump’s strong performance has unsettled investors.
The macro environment has been quite volatile since the Fed meeting last week, reflecting investor nervousness. This should continue for the rest of the week while data/news flow remains elevated and ECB president Mario Draghi and Fed chair Janet Yellen are due to speak today and tomorrow respectively. So volatility in silver may remain elevated.
On the supply side, mine production may tighten this year because production cuts and closures at zinc and lead mines may hit by-product output of silver. The latest INEGI figures show mine production in Mexico was down 4.8 percent year-on-year in the first six months.
Speculative & investment flows:
Speculators lifted their net long position a third time in the past four weeks as of September 20. As we wrote in our latest COT report, speculative buying may continue in the coming weeks due to a patient Fed and its flattening impact on the yield curve. Still, this may not last too long because the dollar and US real rates might rebound at some point in the fourth quarter.
ETF demand for silver remains solid – ETF investors have bought about 210 tonnes this month after 347 tonnes in August. ETF holdings are at an all-time high, suggesting that investor interest remains bright.
Conclusion
Despite the current selling pressure in silver, we are not inclined to change our very near-term (around one month) constructive view as long as the 100 DMA is not breached. We continue to believe that last week’s Fed-driven rally has further to run for precious metals.
