Silver Is Not Buying the Risk Asset Bounce

By: AnyOption

Precious metals remain elevated despite the recent rebound in risk assets as silver prices approach new post-Brexit vote highs amid concerning developments relating to the global outlook.  As central banks in advanced economies rapidly test the limits of monetary policy, rising speculation of renewed accommodation in the United States is driving silver prices sharply higher.  While risk assets have managed to bounce after the referendum sent shockwaves across global financial markets, silver prices have continued to gain momentum, not buying the optimism in stocks and reflecting a sense that haven assets will continue to benefit from growing volatility.  Furthermore, more talk about a return to the gold standard could see precious metals reap the rewards of greater influence in the financial system.

Silver-Gold Ratio Collapses

While not widely covered by financial news outlets and analysts, the collapse in the ratio of how many ounces of silver it would take to buy one ounce of gold has telling indications about the state of financial markets.  In the lead up to many crises, the ratio rises to levels that typically suggest it takes a significantly higher amount of silver to buy one ounce of gold.  Looking at the chart, the highs realized back in February were nearly the same levels as those witnessed back in 2008 right near the beginning of 2009, just as the last financial crisis was really taking hold.  Historically, this has proven a strong predictor of fundamental events that precede shifts in market sentiment in a very real way. 

(goldprice.org)

Looking at how prices have evolved since the Brexit decision, silver prices have made new highs while gold is still well below the $1355.50 per troy ounce reached last Friday.  It is no coincidence that Brexit has stoked uncertainty about the future of the European Union and the pace of globalization.  If anything, it has thrown into turmoil the idea of creating a pan-European susperstate.  Amid all the volatility that has resulted, many prominent economists have come back with the idea of restoring the “gold standard,” most notable among them being former Federal Reserve Chairman Alan Greenspan who has warned of an imminent crisis.  Considering speculation of further central bank accommodation is high across many advanced economies, the backdrop for further appreciation in silver prices amid the uncertainty is considerable.

Fed Unlikely to Raise

One of the biggest shifts that has resulted from the Brexit vote is market participants view towards the path of US interest rates.  According to Fed Funds futures, the probability of a rate hike before the end of the year is now 18.60%, down dramatically from levels witnessed a month ago.  Instead, the US Central Bank may now decide to lower interest rates in the coming months, potentially causing silver prices to climb even further from current levels.  Although unlikely, with the probability, currently sitting at 1.90%, should economic activity deteriorate and force the Federal Reserve to accommodate, the stage could be set for a tremendous rally higher in silver prices.  Furthermore, the fact that silver prices have continued to rise while risk assets are on the mend is symptomatic of renewed risk aversion and hedging, a factor that could add to ongoing appreciation. 

Technically Speaking

While silver prices might have snapped a longer-term downtrend with the price-action of the last few months, it has been supported by numerous technical indicators that add to an upside bias in the precious metal.  For one, the moving average crossover that transpired back in March when the 50-day moving average crossed the 200-day moving average was viewed as bullish, even though it did not offer as strong a signal as the “golden cross.”  Both moving averages are now trending higher below silver prices, acting as support.  Furthermore, the emergence of a potential upward trending equidistant channel could have strong implications for the outlook.  Although prices are nearing the top of the channel, giving a high probability of a pullback, should it remain intact, it could foretell an enduring uptrend.

While near-term there might be a pullback following the most recent sharp uptick, the reversal that began late in 2015 is still holding fast.  A technical correction would be very reasonable considering momentum higher, especially with the relative strength index trending in overbought territory above the 80.0 threshold. After a brief pullback, the next real test comes at resistance of $18.500, a critical longer-term level last tested in early 2015.  Even though silver was unable to overcome this level during the most recent rally, should it be taken out, it could pave the way for a return towards $20.000 per ounce over the coming months and renewed medium-term bullishness. 

Looking Ahead

There are many concerning data points that are pointing to a global economy that is struggling to grow aside from the fact that the dust still has not settled from the British referendum.  The high levels of accommodation undertaken by central banks of advanced economies and challenges in fighting deflation have echoed the idea of monetary policy meeting its limits.  Now that there is greater anxiety about how conditions will continue to develop, investors are still buying up haven assets in an effort to hedge against risk.  When combined with the technical picture, greater fundamental uncertainty could see silver prices maintain the current trend and continue the march higher from multi-year lows as risk aversion creeps back into investor sentiment.

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