Silver Price Forecast: Support Holds as Yields Rise

Can Silver’s Support Hold Against Rising Yields?

Spot silver is higher early Wednesday after failing to follow through to the downside following yesterday’s steep sell-off. Bullish technical factors may be the catalyst behind today’s strength in the wake of hawkish central bank signals and hotter consumer inflation.

Tuesday’s 3.57% decline was fueled by U.S. consumer inflation data that exceeded pre-report estimates. Hawkish policymakers’ comments, which drove up the probability of further and larger rate hikes, also may have encouraged long liquidation and fresh short-selling.

According to the CME’s FedWatch tool, Fed Funds traders have raised the chances of a December Federal Reserve rate hike to 100% from 84% ahead of the data release. Also increasing were expectations of a larger, half-percentage-point rate hike.

The catalysts behind the moves were U.S. CPI data that rose more than expected in October, with headline CPI coming in 0.4% higher. Traders were looking for 0.3%. Core CPI also rose 0.3% in October, hotter than the 0.2% forecast.

Silver started weakening before the CPI report was released. Federal Reserve official Christopher Waller said that if October core inflation hit 0.3%, he would consider a larger rate hike at the December meeting. That meant 50 basis points.

Later in the day, Philadelphia Fed President Anna Paulson said further gradual tightening appears appropriate, while Fed Vice Chair for Supervision Michelle Bowman said inflation remains a concern.

Silver Rallies Despite Higher Yields

Today’s rally in spot silver comes as a surprise with higher 10-year Treasury yields boosting the U.S. Dollar. Both tend to weigh on demand for non-yielding, dollar-denominated silver.

Silver Buyers Try to Build a Counter-Trend Base

Spot silver is edging higher early Wednesday in a counter-trend move. The main trend is down according to the daily swing chart. A trade through $54.63 will change the main trend to up. Taking out $48.62 will signal a resumption of the downtrend.

The minor trend is also down. It turned down on Tuesday when $51.19 failed after trending higher for parts of two days. A trade through $53.73 will change the minor trend to up. This could shift momentum to the upside. If this occurs, $51.13 will become the new minor bottom.

The short-term range is $54.63 to $48.62. Its 50% level is $51.62. The minor range is $48.62 to $53.73. Its 50% is $51.17.

The intermediate range is $62.09 to $48.62. Its 50% to 61.8% retracement zone is potential resistance at $55.36 to $56.94.

The long-term range is $71.18 to $48.62. Its 50% to 61.8% retracement zone is also potential resistance along with the 50-day moving average at $59.25 and 50% of the all-time high at $60.835.

The current chart pattern suggests that aggressive counter-trend buyers are trying to form a potentially bullish secondary higher bottom at $51.62 to $51.17. If this area holds as support, then buyers could attempt a breakout over $53.73 with a target of $55.36 to $56.94.

If $51.13 fails then a new main top will form at $53.73. Increased downside momentum created by the breakdown could extend near-term losses into the main bottom at $48.62.

Weekly Spot Silver (XAGUSD) Technical Analysis

Spot silver is up about 2% for the week as of early Wednesday. The market is trading near the lower end of the all-time retracement zone. This 61.8% support is $46.48. Additional support is a weekly swing bottom at $45.55. On the upside, the major resistance is the all-time 50% level at $60.835.

As long as spot silver stays inside the $46.48 to $60.835 retracement zone, the range supports a longer-term accumulation case. However, with interest rates expected to climb over the near-term and the market trading on the weak side of the 52-week moving average, there needs to be a major catalyst to encourage bullish traders to take out offers and chase the market higher.

What to Watch

Spot Silver (XAGUSD)

Today’s successful test of the $51.62 to $51.17 area is supporting my upside bias. The move is counter-trend and its success relies on buyers taking out the minor swing top at $53.73 to sustain the rally and $54.63 to change the main trend to up. If Tuesday’s low at $51.13 fails as support then my bias could shift back to the downside.

The current chart pattern resembles the bullish mid-July set-up which began at $54.78. Right now, the market is trying to establish the secondary higher bottom, which is the most important. This assumes that many of the shorts covered their positions between $48.62 and $53.73.

Spot silver is in a downtrend on the weekly chart, but we could see some accumulation in the $60.835 to $46.48 long-term retracement zone. However, without a major bullish catalyst, I’m not anticipating an upside breakout. The potential for rising yields may keep a lid on a rally, but accumulation is likely to continue as long as the 61.8% retracement level holds at $46.48. If it fails, prices could drop sharply.

More Information in our Economic Calendar.