Silver, confidently outstripping gold in the first half of 2021, collapsed by the end of the year. Why did it happen? Will the XAGUSD bulls be able to fix something? Let us discuss the Forex outlook and make up a trading plan.
Quarterly silver fundamental forecast
Silver, which started well in 2021, is going to end the year with a decline. The XAGUSD dynamics for the four months from June to September turned out to be the worst since 2014. Amid expectations of the Fed monetary policy normalization, prolonged stay of US inflation at elevated levels, and a decrease in industrial demand, metal futures fell by 25% from the February highs. It seems that this is not the limit.
Silver is both a precious and an industrial metal, which determines its dynamics. The ultra-easy monetary policy of the world’s leading central banks contributed to an increase in both investment demand and XAGUSD price. In March 2020, at the peak of the panic in the financial markets, the Fed created money to buy assets at $75 billion per day. Around the same time, the ECB announced an emergency program for €1.85 trillion, which is equivalent to $2.15 trillion. It is not surprising that with such crazy volumes of liquidity, all indicators have increased!
The European and US central banks are currently buying aggregate assets of about $235 billion a month, and both intend to reduce their activity in the debt market. Their plans assume that the volume of purchases of bonds will fall by an average of $20 billion. The pace is significantly faster than in 2013-2014, when the Fed was getting rid of monetary stimulus at a rate of $8.5 billion, and the ECB, on the contrary, bought them for $3.9 billion per month. It is not surprising that the yield on US Treasury bonds is now growing so rapidly, contributing to the fall of precious metals prices. Hedge funds have cut silver net longs to their lowest level since June 2019.
Dynamics of speculative positions and prices for silver
Source: Wall Street Journal.
In the first half of 2021, impressive growth in manufacturing activity supported the XAGUSD bulls. Now everything is turned upside down. Supply disruptions, high prices, recruitment difficulties and an energy crisis are slowing down global production and industrial demand for silver. According to Jerome Powell, supply chain difficulties will continue in 2022, which does not rule out a longer period of high inflation than the Fed anticipated.
What is currently happening in the global economy increasingly resembles the supply shocks of the 1970s and threatens with stagflation. If, because of this, the Fed refuses to normalize monetary policy, precious metals may rise from the ashes. However, in my opinion, such a scenario is unlikely. In contrast to the energy crisis in Europe, the US economy is poised to accelerate in the fourth quarter. Divergence in GDP growth rates will play into the hands of the greenback and spoil the mood of the XAGUSD bulls.
Quarterly silver trading plan
Thus, the medium and long-term outlook for silver looks bearish. This assumes the development of a downtrend in the direction of $20.7 and $19.6 per ounce. A strong US jobs report for September may become a reason to enter sales. On the contrary, the weak report will exacerbate the correction risks to $23.6 and $24.2, the rebound from which will allow entering short trades.
Price chart of XAGUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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