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Silver: Glint of Breakout on US Dollar Run, Industrial Demand

Published 08/23/2023, 03:44 AM
  • Silver rallies 5 days in row, early departure from 5 weeks in red 
  • Run-up predicated on continued industrial demand/dollar strength
  • China slowdown could slow global industrial progress crucial to the white metal
  • After five consecutive weeks in the red, silver longs could certainly use a break.

    And that’s exactly what charts of the so-called white metal are suggesting after a slump of 10% between early July and mid-August.

    Silver has gained almost 5% from a mini run-up stretching back to Aug 18. 

    Originally prized as a jewelry metal before the discovery of a myriad of industrial uses for it, silver is also valued these days as a key renewable energy input due to its use in solar panels. 

    The run-up in silver, sparked by the triggering of key support levels on the metal’s way down over the past five weeks, could continue if there are signs of steadying industrial demand.

    For that, two things will be necessary: data showing no slip-up in the U.S. economy and a firm dollar.

    Peculiar as it may be, the relationship between the dollar and silver is sometimes different from the traditional inverse relationship between the U.S. currency and commodities/precious metals in general.

    Because of the industrial demand component, silver thrives in a sound economic environment. Gold, meanwhile, behaves completely the opposite as a safe haven against economic troubles.

    And because steady or good industrial demand will also be reflected in the strength of the dollar, the silver rally’s sustenance might be predicated on the greenback staying firm as well. 

    The Dollar Index, or DX, which pits the U.S. currency against six majors, hit a two-month high of 103.625 in Tuesday’s session. 

    That could remain a near-term inflection point for the dollar ahead of Friday’s speech by Federal Reserve Chair Jerome Powell at the central bank’s annual policy event in Jackson Hole, Wyoming that sets interest rate expectations for the rest of the year.

    Powell’s speech comes after last week’s minutes of the central bank’s July meeting showed that most policymakers are still concerned about upside risks to inflation, indicating that further rate hikes cannot be ruled out. 

    For now, though, traders on the money market see an 89% chance of the Fed holding rates at current levels at its September meeting, according to Investing.com's fed rate monitor tool.

    The China Challenge

    Notwithstanding the state of the dollar, silver could also see renewed bearishness on fears about the economic malaise in China — the world’s No. 2 economy and the largest maker of solar panels that’s been driving the demand for silver.

    China's renewed economic weakness has raised questions over whether its demand for silver and most other commodities can remain resilient.

    July was a particularly woeful month for China, with one bad patch of economic data after another, from bank loans at a 14-year low and exports sliding most since February 2020.

    The yuan also tumbled against the dollar, adding to the weight on commodities, particularly oil.

    Most recently, Evergrande, one of China’s biggest names in real estate, filed for Chapter 15 bankruptcy protection, which is a way for foreign companies to use U.S. bankruptcy law to restructure debt.

    The process will take time, as Evergrande has roughly $19 billion in offshore debts.

    The filing serves as a cautionary tale about the growth-at-all-costs model that underpinned China’s spectacular growth over the past 30 years. For decades, Evergrande gobbled up debt as China’s economy exploded.

    Demand for housing was so strong that homebuilders often pre-sold apartment units to buyers before construction was complete.

    But a sudden shift in policy by China’s leaders two years ago has left the country’s property developers scrambling for cash, compounding financial risks within the world’s second-largest economy.

    Evergrande’s crisis raises questions on which would be the next shoe to drop on the Chinese economy. And that appears to be Country Garden, another major name in realty that employs some 300,000 people.

    The firm has already missed two payments on its multibillion-dollar debt and said it was considering “various debt management measures.

    The People’s Bank of China has unexpectedly cut short and medium-term lending rates in response to the crisis, but investors are calling for more targeted fiscal measures.

    Silver's Technical Outlook

    As aforementioned, the dollar seems to have reached a near-term inflection point with its two-month ahead of Powell’s speech at the Fed’s annual Jackson Hole, Wyoming policy event that begins this Friday.

    Silver could enter a new period of fundamentally-driven bearishness if the dollar’s ascent stalls, telegraphing a weaker U.S. economic scenario. 

    It could, however, extend its run-up if the dollar continues to rise.US Dollar Index Daily Chart

    Charts by SKCharting.com, with data powered by Investing.com

    In Tuesday’s session, silver for September delivery on New York’s Comex finished at $23.45 an ounce after hitting a two-week high at $23.712.

    The spot price of silver, more closely watched than futures by some traders, settled at $23.39 per ounce — after a two-week high of $23.6565 reached in the prior session.

    Scenario 1: Stronger Dollar and Silver 

    • DX Above 104 
    • Spot Silver Above  $23.75

    The Dollar Index maintaining stability above 200-day Simple Moving Average, or SMA, at 102.98 indicates strength with potential for further upside towards 104 and 104.60, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

    If the strengthening dollar results in increased industrial demand for silver,  the metal can clear immediate resistance at the 4-Hour 200 SMA of $23.75 and advance towards 100-day SMA of $23.98, Dixit said.

    The next higher resistance zone would be $24.50, $24.80, and $25.25.

    Scenario 2: Weaker Dollar and Silver 

    • DX Below 103 
    • Silver Below the 200-day SMA

    DX at below the 200-day SMA of 102.98, followed by a break below the 102.90 level, will mean dollar bulls losing their grip, sending the index toward the daily Middle Bollinger Band of 102.55. 

    Below this, the 100-day SMA of 102.20 and the horizontal support zone of 101.60 can be tested. 
    Spot Silver Daily Chart

    If weakness in DX mirrors a lack of industrial demand for silver, then $23.75 and $23.98 will act as resistance, pushing the metal down below the 200-day SMA $23.30, followed by the 4 Hour 50 Exponential Moving Average, or EMA, at $23.02.

    If this zone fails to hold as support, expect a further drop to the horizontal support zone of $22.50. Spot Silver Weekly Chart


    Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. 

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