By Giles Coghlan, Chief Currency Analyst, HYCM
Every trader knows a silver bug who’s been diligently accumulating coins and small bars throughout good times and bad, regardless of whether it’s up at its highs or down in the doldrums. These individuals invariably cite the diminishing buying power of fiat currency, the need for hard assets, and the historic manipulation of silver markets as the reasons to be stocking up on sterling.
Their arguments generally go unheeded, but now in our post-COVID world, many are willing to hear them out. Particularly the retail crowd who’ve started testing their coordinated influence over the past year.
The Story So Far
Following a high-profile short squeeze on GameStop (NYSE:GME) by retail traders that sent the beleaguered stock to unbelievable highs, speculators on the WallStreetBets sub-Reddit were rumoured to be shifting their attentions to the silver market. Several weeks ago, the idea for a silver play, in which retail investors buy up physical silver, silver ETFs, and silver mining stocks en masse, began to spread. There appears to have been some disagreement amongst these traders as to whether to continue hammering the GameStop play, or to move on to silver, which led to the creation of the Wall Street Silver sub-Reddit on January 29.
Then, on Monday, February 1, silver futures hit their highest level in eight years, soaring by over 20% to break the $30 mark for the first time since 2013. The move was short-lived, with silver prices retracing to around $26 by February 4. This prompted pundits to suggest that the Reddit traders had met their match in the more complex supply and demand dynamics of the global silver market. However, let’s not forget that most of us only heard about the GameStop play when it had already started causing dislocations in financial markets. It was actually a prolonged slow burn that originated in the wake of the COVID crash back in March 2020. Is there a chance that headline-driven financial media are overlooking a more sustained move in silver prices that could just be getting started?
Fundamental Picture
Fundamentally, the retail crowd seems to have stumbled upon silver at the right time. There are a number of convincing reasons why the broader economic climate may be conducive to higher silver prices. For one, we have a $1.9 trillion stimulus package being proposed by the Biden administration, including a $1,400 sum to be directly payable to individuals. Precious metals could receive a further bid here, both as an inflation hedge in response to rampant balance sheet expansion, and as a result of individuals reinvesting their stimulus cheques into hard assets. Let’s not forget that some of the retail-led market euphoria we’ve seen over the past year or so has been a direct result of stimulus money finding its way back into capital markets.
Conversely, silver’s dual status as a safe-haven and industrial metal means that it’s also likely to find itself in demand if the recovery narrative plays out. Silver is used in everything from semiconductors and touch screens to batteries and photovoltaics, so a global economy back at full speed will most likely create further silver demand. Moreover, silver’s manifold uses in green technology mean that there’s a third scenario in which the global economy doesn’t quite achieve lift-off, but governments heavily subsidising the green revolution in an attempt to create growth in new industries will also most probably lead to silver being in demand.
In the short term, there are many reports coming out from bullion dealers that retail investors have been buying up all available physical silver for delivery. Dealers are reporting running out of inventory, with many now selling for future delivery.
Technical Picture
Technically, silver also looks as though it may have further to run. In the short term, it appears to have found support at around $26, following the Reddit-led mass buying. Zooming out a little, the precious metal’s recent move has been no flash in the pan. It’s actually been setting higher-lows and higher-highs since back in November, with the most recent retail-led February 1 spike seeing it setting a higher-high in relation to its August 6th peak. All eyes will now be watching for a break below $26, or a break above $28.
Zooming out even further, silver’s price chart appears to be respecting the 20-week moving average, which itself is currently at its highest level since June of 2013. If it were to continue rallying from here, the next significant levels of resistance are likely to be found at $35, $42, and then at 2011s all-time highs at around $50. Finally, the price appears to have already tested and failed to break below the $20 mark, both in September and November of 2020.
Considering that the current market environment has led to many assets testing and exceeding their former highs, and taking into account the possible economic tailwinds that we have outlined above, things could really start to get interesting for silver from here.
In Summary
So, to sum up, the confluence of rising inflation, a nascent recovery, increased focus on green tech, stimulus cheques and a retail crowd that’s also well on board, all make silver a precious metal to keep a close eye on into, and possibly beyond Q2.
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