Silver got no love last week, suffering its worst week in thirteen weeks, and raking up a fourth straight month of losses. After losing US $1.35/t.oz between September 13 and September 18, the metal closed on Friday at US $22.38/t.oz. Before last week, Silver had not traded sub-US $22.50/t.oz for the entire 2021. One would have to rewind their charts to November 2020 to find Silver trading below US $22.50/t.oz.
The cause of Silver’s unpopularity might be the signs indicating that the US economy is in decent shape, regardless of Delta variant fears. For one, Retails Sales in the US pleasantly surprised last week, rising 0.7% vs an expected decline of 0.8%. With positive signs radiating from US economic reports, the seriousness of talk concerning a Fed-taper heightens, and with that, a stronger USD, and less demand for metal hedging.
We might be in uncharted territory here. At least according to a technical perspective and recent history. Silver has successfully defended the US $22.50/t.oz price level multiple times over the past twelve months. To find a closing price below this threshold, trek to July 2020, when Silver closed at US $19.40 as it ascended for eight weeks straight, to seven-year highs, topping out right before US $30.00/t.oz.
Now that the closing spell has been broken, a new era of prices may be on the way for Silver. Moving forward, don’t be surprised by a new range for Silver between US $20.00/t.oz and US $22.50/t.oz leading up to an announcement from the Fed concerning a definite taper timeline. It is possible that the FOMC meeting, scheduled for this coming Thursday, followed by Fed Chair Powell’s speech on Friday, will be the events responsible for the metal’s next significant move.
The Australian Dollar (AUD) is commonly referred to as a commodity currency. As in, the relative strength of the currency is correlated with the price of certain commodities. For the AUD, Iron Ore and precious metals are the commodities that significantly impact its value.
Be that as it may, there is more to the AUD than commodity prices. The actions, or inaction, of the country's Central Bank is also a decisive variable affecting the price of the AUD. Therefore, a well-rounded analysis of the events concerning the AUD is helpful for traders of commodity currencies.
With this in mind, let us look at some of the key events likely to affect the commodity currency next week.
A critical economic report is due from the Reserve Bank of Australia (RBA) on Monday, and traders will be watching and folding the results into their own trading decisions.
Australia Reserve Bank Governor, Philip Lowe, will be speaking on Monday. However, the RBA's public announcements have recently fallen down the rankings of importance for traders. The RBA is stubbornly dovish, and no one is expecting them to make any changes to its base interest rate or asset purchasing any time soon. Yet, the 15-day SMA closing in on the 50-day SMA in the AUDUSD chart supplied indicates the bearish disposition of the AUD may reverse.
The price of Iron Ore has famously hit record prices this year, contributing to record Australian export values and the AUD reaching USD 0.79.
However, the high prices Iron Ore fetched in May have since evaporated, and with it, the AUD has fallen from its lofty perch. Currently, Iron Ore is priced at US $132.5 per tonne, a 2021 low representing a 40% decrease from its 2021 high. The price drop has been sharper than its rise, as China's stockpile of Iron Ore kept rising and demand from Chinese manufacturers declined.
The price of Iron Ore is expected to remain somewhat robust for the remainder of 2021 before falling to US$100/T by March 2022. At least, according to Goldman Sachs and the Australian government's commodity forecaster. However, the forecasts available were made before the slowdown in the Chinese economy became undeniable. The drop in Iron Ore could come sooner rather than later.
Countering the prediction that Iron Ore prices will fall is the developing political upheaval in the African nation of Guinea. The West-African country is a young up and coming Iron Ore producer. Its Simandou Iron Ore Project is expected to rival one of Western Australia's most prolific mining regions. As such, the pricing prediction of Iron Ore moving forward into 2022 and beyond considered Guinea's fresh supply of Iron Ore hitting global supply chains. Needless to say, if political strife in Guinea were to continue, prices might remain inflated for longer. In such a case, the AUD could rely on Iron Ore supporting a higher baseline.
Silver has rejected prices lower than $21.5 and higher than ~$30.0 for more than a year. What it hasn’t done, until recently, is cross below its 50-day simple moving average in this time. Consequently, we might expect a very strong retest of the $21.5 level in the next couple of weeks. Strengthening this proposition, the alligator bands have separated and creating some distance between themselves. there is very little indication that a reversal is imminent.
The USD, currently at a ten-month high, has absorbed the news that the Fed is likely to slow the pace of asset purchases before years end. Naturally, we might expect the USD to jump on such information, and as an inverse correlate, Silver to fall.
During the Wednesday US session, after the release of the Fed minutes, the USD index fell from 93.15 to 93.05. However, in early Asian trading, the USD has powered its way up to 93.30. The slight drop on Wednesday could be attributable to the Fed’s unassertive tone and the presence of some dissenting voices. In any case, Silver isn’t going to be benefiting from a weak USD any time soon.
Silver has favoured a position in the lower half of its ranging band. So, an extra significant catalyst will have to present itself to push Silver above $27.0 and, once that hurdle is cleared, onward to $30.0.
For one, global demand would have to really pick up. And pick up at a greater rate than that which an average Covid recovery could spur.
What Silver needs is the green revolution. Such a proposition is not entirely preposterous. This brings me to the reason I wanted to write this article in the first place.
Yesterday the Biden Administration announced that it has a target for 40% of the electrical energy consumed in the US to be generated by solar panels by the year 2035. Currently, the US produces roughly 3% of its electricity via Solar.
As it stands, solar panel manufacturers are responsible for approximately 20% (or 3,000 pounds) of global industrial silver consumption. Thus, regardless of how the US accomplishes its goal (technological innovation and government incentives, no doubt), the flow-on effect for Silver could be the significant catalyst it needs to build, and sustain, some significant gains.
In 2020, Silver had a legendary rise from its low during the peak of the Coronavirus lockdowns in March – up over 140%. Analysts (including me) attempted to justify its price and separate its strong correlation with Gold by arguing that Biden's climate change policies will boost Solar Panels' use, which extensively uses Silver. This may be a catalyst in the longer term.
However, in the short to medium term, Silver is unlikely to be affected by this catalyst. With a new US President in the seat, alongside a decrease in Gold's price, what are we going to see in the price of Silver?
From September till the present, Silver has been fluctuating between $22.40 and $27.30 reliably. We can see clean candles to the downside from the $27 mark, predicting strong moves to the downside if it rejects that strong psychological level.
The Gold /Silver Ratio reached an all-time earlier this year when Silver's price collapsed to $11.94 when investors flew to equities out of fear of market fluctuations. The Gold/Silver Ratio is a ratio of how much silver ounces must buy a silver ounce of Gold.
With Gold quoted to rise in the medium due to inflation concerns, some analysts predict a Bull Run in 2021 for Silver. Philip Newman, a consultant at Metal Focus, stated that "We are going to see new record highs for Gold and Palladium [in 2021], but silver will see the chunkies gains,"
Silver has had a legendary run this year, is heavily correlated with Gold. However, that was only in regards to the movement.
Before September, Silver has outperformed Gold year-to-date, and even from its March lows. Year to date, it has returned just under 50%. Meanwhile, Gold has returned 27%. From March, Silver has returned 68%, while Gold only returned 24% from the same period.
However, in September, the equities' market selloff has transferred to both Gold and Silver, hitting Silver incredibly hard. Silver dropped 14% this month, in comparison to Gold, only falling 3.25%. If Gold was a haven turned speculative bull run, Silver was a speculative run on steroids. However, some fundamental factors may show some profit-taking.
Investors who invest in metals and commodities such as Oil, Silver, and Gold tend to put their capital into ETF backed by metals, instead of buying futures or the physical metal, primarily due to low transaction costs. However, investors have started to take money out of these ETF's, especially Silver backed exchange-traded funds – raising worries that the rally in Silver might be over. IShares Silver Trust ETF has seen a 3% decrease in its silver holdings over the past month to 555m ounces.
The initial case bulls were using to justify the silver trade was its use in Solar Panels. The rally came from the ECB and Joe Biden promoting policies pushing on cleaner power, with the ECB apportioning a large portion of their stimulus package to fighting climate change. However, as risk-off prevailed at the start of this month, investors started to question the actual demand for solar panels at this stage.
Furthermore, with its correlation with Gold, weakness in bull factors for Gold is also associated with a weakness in Silver. Gold is historically associated as a hedge against inflation. With the Fed making it their goal to increase inflation by allowing inflation to go above their 2% mandate, investors and traders question whether they are able to stimulate inflation even amidst their unprecedented rate cuts and quantitative easing.
For now, we've seen a selloff in many risk on assets – so these metals may be a part of that. Will we see further setbacks for the two metals?
Anish Lal did an excellent technical analysis on Gold and its future. You can watch it here.
Gold reaches an all-time high amidst Geopolitical tensions and the Coronavirus continuing to fuel demand into safe-haven assets. The yellow metal's spot reached a high of $1944.52 during the Asia session, smashing the record print of $1923 by $21.
Geopolitical tensions and the Coronavirus are not the only factors driving the price higher for Gold. A weaker dollar, low-interest rates around the world, and massive quantitative easing and stimulus have increased the risk of stagflation. Sluggish growth and rising inflation fuels stagflation, in which bond yields returns are virtually non-existent. Gavin Wendt, a Senior resource analyst at Minelift Pty stated that “Strong gains are inevitable as we enter a period much like the post-GFC environment, where gold prices soared to record levels as a result of copious amounts of Fed money being pumped into the financial system.” This is further backed by both Bank of America and JP Morgan having a $3,000 price target for Gold.
With the Federal Reserve speaking at the end of this week, a dovish town from Chairman Jerome Powell may send the yellow metal upwards.
We can draw information from the Bitcoin in 2018, where the price almost touched $20,000 before experiencing a sharp reversal down to 3,000 by the end of the year. The difference between Bitcoin and Gold is that there has been a historical precedent for the metal performing as a safe haven in risk-off episodes. May it is for viable reasons or a self-fulfilling prophecy, the correlation has been stable over the past decades. With Bitcoin, it was a case of the “Greater Fool Theory” fueling the price upwards. The Greater Fool theory states that the price of a security is determined not by its intrinsic value (how much net cash flow it brings in), but the relative demand. In this case, demand for Bitcoin was up due to speculation in the cryptocurrency, pushing the prices higher. However, Gold's initial push upwards is on a valid basis, assuming that it holds its own as a haven asset. Therefore, if the macro environment continues to deteriorate, we will likely see Gold print new highs in the future.
Here is your week ahead
Wednesday, 29th July – AUD Consumer Price Index, Federal Reserve minutes and Interest Rates Decision
Thursday, 30th July – United States GDP Annualised
Friday, 31st July – China Non-Manufacturing PMI
Coronavirus cases: 16.2m
Coronavirus deaths: 648k
Markets have been moving today on the back of positive vaccine news amongst concrete stimulus hopes.
Silver rallied to a peak of $21.319 as investors and traders bet that a push to green energy will provide a silver lining to the metal. It is interesting to note that Silver has outperformed its counterpart Gold, with a 70% rise since its March lows. Analysts at Citibank expect Silver to hit $25 an ounce by the middle of 2021. Citi expects a clean energy push if Joe Biden, Democrats Presidential Nominee, gets elected. Biden has placed importance on clean energy in his $2 Trillion plan to push the US out of the Coronavirus's recession. Furthermore, the latest stimulus 750 Billion Euro stimulus plan from the EU has allocated a third of that recovery fund into fighting climate change. Silver is extensively used in the production of solar panels.
However, Silver's rise does not mean its Gold counterpart is doing too bad either. Gold reached a new time high, with the spot price rallying to 1,483.45 an ounce before pulling back slightly. Over $40 Billion has flowed into gold-backed ETFs in the first year, breaking last year's record. Downwards pressure on the US dollar due to quantitative easing and fiscal stimulus has forced investors to look towards these metals for yield.
Brent Crude Oil broke past $44 in the New York session as fiscal stimulus and backwardation finally broke past the resistance of $43.929. The black gold reached a peak of $44.998, before pulling back slightly. However, oil still has a little bit more to fill that gap to $45.228. This is in the midst of Chevron acquiring Noble energy in an all-stock deal for $13 Billion, a 7.5% premium from its current value. An industry filled with bankruptcies due to the Coronavirus, Chevron stands out with a strong balance sheet enabling it to take advantage of the crisis alongside keeping their dividend payout.
The Euro rallied against the US Dollar, peaking at 1.15289 as the European Union clinches on an agreement on stimulus funding. The recovery fund worth 750 Billion euros hopes to pull the bloc out of the recession. With a myriad of bond sales and taxes to finance the stimulus, the fund expects to give out 390 Billion Euros of Grants to harder-hit countries such as Greece and Italy, and over 360 Billion Euros in loans. "We are 27 around the table, and we managed together to produce a budget," Macron said at a press conference alongside Merkel. "In which other political sphere in the world is that possible, is that done? None."
Finally, in the Equity markets, we saw the SP500 and Dow Jones clinching a gain in the New York session, finishing higher than the NASDAQ. This is on the back on hopes that Congress can pass a second stimulus deal. However, agreement on the size of the stimulus cannot be agreed upon. Nancy Pelosi believes that $1t is "not close to enough" for the next stimulus. NASDAQ pulls back slightly of their all-time as investors await on tech earnings this week. However, they still lead in earnings relative to other equities.
Anish Lal has some excellent technical analysis on the rise of Silver today. You can watch it on our YouTube account here.
Gold finally pushes past $1,800 as retail investors plow $40 Billion into gold-backed funds.
As Coronavirus cases around this world approach 12 Million, Gold has seen a 19% rise year to date as investors continue to crave safe havens. HSBC's James Steel stated that prices" were already rallying well before the emergence of Covid-19", which has given Gold more momentum. Furthermore, the increase in Gold's investment has helped offset a collapse in Jewelry demand, with HSBC estimates being down 20% this year.
There have been other factors other than the Coronavirus increasing the demand for Gold. A low-interest-rate environment and quantitative easing tend to boost demand for metals as investors start looking for alternative safe investments that may provide capital gains.
James Steel predicts a push to $1,845 by the end of this year, before dropping to $1,705 the next year. However, some banks are more bullish on the bullion. They predict Gold prices to reach $2,000 in 2021, citing low-interest rates and devaluing the USD due to Quantitative Easing. "Gold investment demand tends to grow into the early stage of the economic recovery, driven by continued debasement concerns and lower rates. "Alongside this, JPMorgan recommended investors to stick with Gold in the midterm, citing similar reasons.
It is interesting to note that clearly demand for Gold has been steady, pushing the price higher. However, at the same time, the demand for risk on the asset are still high, evident in the new records being set by the NASDAQ and many risks on stock such as Tesla and Amazon. It shows that this massive divide with investors is cautious of the recovery, and investors who think quantitative easing and fiscal stimulus will continue to prop up asset prices. If the economy continues to recovery, we are likely to see Gold move to the downside.
Will Gold breach $1,900? Anish has some brilliant analysis of the future price action of Gold and Silver. You can watch it here.
As investors turn risk-on equities this week, both Gold and Silver experienced a significant sell off, based on news that the US may remove tariffs on China. This led to US Stocks recording new all-time highs, with the Dow Jones up over 2.3% this week and a safe-haven trade wind down, as Gold and Silver slumped 2.3% and 5.2%, respectively.
This news has still not been confirmed by US Trade authorities, however we could continue to see speculation drive markets for today's trading.
Gold and Silver, now trade at key support levels, wicking to the October 1st low of $1,460 per ounce, with buyers looking for an opportunity to "buy the dip" or look for shorter-term reversals. The chart below shows several ranges that Gold has formed over the last few months, and investors will be looking for this to remain consistent barring any other stimulus news, with bulls looking to potentially target a retracement towards the $1,475 mark.
The Bank of England gathered yesterday as two MPC members voted for an interest-rate cut, which weighed on GBP bulls, who are still fighting to hold up the 1.28 level. The pair reached fresh two-week lows, with bears now looking to breach the 1.28 handle. See chart below.
BOE Governor Mark Carney, in the post meeting conference, said that risks to UK growth remain skewed to the downside, suggesting the BOE could eventually shift towards a cut, with a view of supporting the economy during a potential downturn.
►The RBA, who held interest rates, said that Australia is slowly coming out of a slow patch, with record rates at all-time lows, the Aussie Dollar aims to breach the 70 cent mark against the US Dollar.
► US Stocks continue to trade at all-time highs and Trump is very happy, however on the Corporate side, there are key Tech earnings coming out soon which could change the momentum shift