Although the price of silver is currently trying to move away from the two-year low, it’s still trading dangerously close to it. The white metal was just fluctuating around $14.50 per ounce, up 3.88% from the November low at $13.86, which also represents a two-year low on the popular commodity.
Thus, the current uptrend might be a correction of the long-term bearish trend, which, judging by the 1-day chart, started in June of this year when silver was trading at around $17.10. If silver is about to rise, it will represent an excellent opportunity for Exness traders who are watching this precious metal closely.
Be ready to buy if silver bounces back
Why is silver declining?
First of all, silver shouldn’t be analyzed separately from the bigger picture. The correlation with gold is still strong, and even over the past few weeks, the white metal has continued to follow gold. Therefore, one can argue that the current bearish trend is more of a precious metals’ phenomena in general, rather than being related to silver itself.
The question then becomes – why are the precious metals, with gold and silver leading the way, moving in a downtrend? While there are many factors affecting the price of gold and silver, the current bearish sentiment is most likely driven by the US dollar and the position of the US Federal Reserve System (“the Fed”).
It’s important to understand that there is an inverse correlation between the US dollar and silver and gold, given that the latter ones are often viewed as safe-haven assets. The reasons behind this inverse relationship are simple:
- When the US dollar declines, investors tend to move their cash into alternative investments to preserve their wealth, and silver is also a part of this group. Besides, a falling dollar suggests an increase in the price of foreign currencies, which also boosts demand for commodities.
- When the US dollar strengthens, often pushed by the Fed’s decision to increase interest rates or by US economic growth, the demand for silver falls as investors are tempted to store their wealth in the American currency instead.
So, judging from these simple correlations, we see that silver, along with gold, is heavily affected by a stronger US currency. The US Dollar Index (DXY), which tracks the USD against a basket of other major currencies like EUR, JPY, GBP, CAD, and CHF, is currently trading close to its 15-month high.
In fact, in order to understand the intensity of this inverse relationship, you should know that the USD Index reached its 15-month high on November 13, while silver touched its two-year low the very next day.
In reality, we might observe a correction in both cases, and the inversely correlated trends might resume, which means silver may be headed for a new low in the near future.
The dollar is gaining momentum after the Fed meeting in early November and has also been boosted by positive US economic data. The US Dollar Index also traded higher this month because of fears of a slowdown in the global economy, China's weak economic data, Brexit uncertainties, and Italy’s EU budget problems.
On the other hand, the same economic problems around the world can support the price of precious metals, as demand for the latter ones always gets a boost in moments of crisis and panic. For the time being, however, geopolitical events still favour the US currency, which may make gold and silver less relevant as safe-havens in the near-term.
What are the technical Indicators saying?
On the daily chart, silver has been moving in a sideways trend since the first few days of September 2018, when it finished its steep bearish trend that started in June of this year. However, the current sideways direction might suggest that the market is simply taking a breather before resuming its long-term downtrend. While the 1-hour and 4-hour charts are showing short-term strong bullish rallies, it’s important to keep in mind that these rallies go against the direction of the overall trend, which is still down.
Below, we have applied two simple moving averages (SMA) to silver’s 1-day chart: A 9-dat SMA and a 22-day SMA. As you can see in the chart, the faster SMA recently crossed the slower SMA from top to bottom, which is generally a bearish signal. In addition, the Stochastic Oscillator is above the line that indicates the overbought level, which suggests that the short-term bullish move might be coming to an end soon.
As silver is currently moving in a sideways trend, it is still an open question which direction it will ultimately move in. However, technical analysis tends to lean to the bearish move. The market can still be traded in either direction on the shorter timeframes, but long-term investors should remain cautious, as the white metal may still have room to fall. Traders hitting the "Buy" button when the price reversal occurs will see a very profitable Q4.
Be ready to buy if silver bounces back
This article is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience, or current financial situation. This article is not prepared in accordance with legal requirements promoting independent investment research, and Exness is not subject to any prohibition on dealing before the release of the article. Readers should consider the possibility that they may incur losses. Therefore, Exness is not liable for any losses incurred due to the use of its articles. Please note that past performance of an asset is not a reliable indicator of future results.