Silver price likely to stay under pressure near-term; crucial support at $17.31 per ounce

Dharmesh Bhatia

In line with our previous recommendation “BEARISH SILVER” dated 22nd January 2020, Silver prices corrected till $17.35 and have been under pressure for the past two weeks. The trailing stop loss on the short position should be adjusted to $18.09 for the next target level of $17.17-$16.49. The breaching of the support level $17.31 could trigger a sharp fall towards $16.49 and below.

Divergence: RSI is at a selling position and trading near 50 levels. Should Silver consolidate below $17.31, we could see fall towards $17.17 and below.

Major Level to keep an eye on $17.31

Support1- $17.31, Support2-$16.49 & Resistance1-$18.65, Resistance2-19.64.

Update

Silver prices consolidated below $17.60 this week as the number of new coronavirus cases fell, while uncertainty over the economic impact of the outbreak underpinned the precious metal. Also, the US dollar stayed close to four-month highs after soaking up safe-haven flows and Federal Reserve Chair Jerome Powell told Congress on Tuesday the US economy is in a good place undermining Silver’s appeal.

Silver price for the past two years is showing a range bound volatility between key support and resistance line with a flat top and higher bottom formation. Also, in the last few weeks price has exhibited a resistance near $18.65, which is also a triple top pattern and corrected sharply towards the support level $17.31-S3. Further, in the last five years price has been unable to hold above the key psychological level of $19 due to some profit booking. The RSI remains flat and is holding near 57 suggesting a range bound movement.

In the short term, we expect residual weakens towards the previous support of $17.31; a sustainable weekly close below $17.31 could trigger an extended fall towards $16.49 and lower. Strong resistance is at $18.65 and $19.64.MACD and stochastic oscillator are suggestive of neutral momentum.

Major Level to keep an eye on $17.31

Support1- $17.31, Support2-$16.49 & Resistance1-$18.65, Resistance2-19.64.

For All Commodities Related News - Click Here

Silver ETF’s Drop

Silver has had an uneventful beginning this year, falling behind gold’s gains as it ended 2019. ETF holdings, which had reached a record in September, saw a ninth straight weekly drop reflecting investor preference tilting towards gold. ETFs cut 4.6 t oz of silver from their holdings in the last trading session, bringing this year's net sales to 8.19 million oz and making it the fifth straight day of declines. Whilst, 45.2 t oz gold was added to ETF holdings increasing the holdings by 0.3% this year.

Silver-Gold Price Breakout

Silver has been under-performing in the majority of asset classes, despite the Middle East tensions that many thought would boost the value. Silver has been trading in $14 to $22 range for six years and a break above $22 would suggest a real break out. During 2019, gold broke put from a key multi-year resistance at $1,365 while silver continues to make one leaving speculators to wait for a reliable breakout.

Also read: Gold rises Rs 183 to Rs 40,766 per 10 grams, silver gains Rs 215 to Rs 45,890 per kg

Gold-Silver Ratio nears 6-Month High

The gold/silver ratio currently stands at an extremely high level of 87.40 to 1 which is well above its long term average. The ratio now nearing to an extreme which suggests favorability towards gold that could outperform Silver.

At the end of 2019, major economies slowed down in step with each other, triggering a wave of interest rate cuts and with the global economy now bottoming out along with uncertain growth outlook, Macro-economic fundamentals continue to support precious metal prices to some extent.

Gold being a risky asset and moderate inflationary pressure, these two factors can help push its price higher. As the gold rally continues on the risks of a crisis triggered by extreme events and the gold/silver ratio etching to extremes, it might trigger a correction in silver prices.

(The author is Associate Vice President, FX and Commodities, Emirates NBD)

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.