With much of the attention on Bitcoin becoming a potential replacement for gold (which we don’t agree with) silver has been almost forgotten. The grey precious metal has been trading inside a very narrow range with no clear directional bias for a very long time now. But there are a few reasons to be optimistic about silver’s outlook and we think that at some point in the near future it will break higher. As the global economic growth gathers pace, demand for industrial metals including silver should rise while the precious metal’s small safe haven appeal should prevent it from significant falls in the event of a stock market correction. Buck-denominated silver also tends not to be impacted by the dollar’s volatility much compared with gold. In addition, the grey metal is holding support around a long-term technical level. Finally, in nominal terms, there is so much further that it could fall with the metal currently costing just $16-$17 per troy ounce.
Silver has been able to absorb much of the dollar’s strength we saw between February and May. While the Dollar Index has risen almost 7.7% from its February 16 low to its May 29 high, the buck-denominated grey precious metal has fallen just 3.6% during the same period. While silver does still tend to correlate positively with the EUR/USD and negatively with the USD/JPY, its correlation is quite weak with both pairs and varies over time as shown in the table below. Unsurprisingly, silver continues to correlate positively with the yellow metal, but even so the correlation over the longer period between 3-12 months has been quiet weak. Recent correlation between the two metals has been stronger, though. Meanwhile silver has actually managed to rise and fall in tandem with stocks, albeit very hesitantly as its weak positive correlation against the S&P 500 shows.
Figure 1: Silver correlation coefficients as of 07/06/2018
So, in summary, silver continues to go in the opposite direction of the dollar most of the time but it has a very weak relationship with it which also changes over time. It’s positive, albeit weak, correlation with stocks suggests the metal is less of a safe haven asset than one would assume. This may be because of its other use as an industrial material. Stocks tend to go up when the global economy is doing better, when demand for industrial materials tend to rise. But at the same time, silver still responds to changes in the price of the other precious metal, gold. All these findings suggest silver is probably more prone to extreme moves in the stock markets and dollar than gold, potentially making it a more ideal investment asset over the long-term.
However, silver hasn’t really gone anywhere over the past several months, though this is probably not a bad thing from a long-term bullish perspective. It has been oscillating around the $16-17 mark for much of the past 1.5 years. However, the very long-term picture is still bullish as shown by the rising trend line on the monthly chart, which has been in place since the year 2003. With silver also positing a few higher lows on the smaller daily time frame, this suggests it could be about to stage a significant breakout at some point down the line. Perhaps a bullish breakthrough could be a break of the down trend shown on the daily time frame. Shorter-term resistance is seen at $16.80. Meanwhile, short-term support levels are seen at $16.50 and $16.20. As things stand, this long-term bullish outlook would become invalidated upon a break below the long-term uptrend, while in the short-term a move back below $16.20 would also be a bearish development.