FED with average inflation targeting – Silver still eyeing 30 USD

September 01, 2020 15:30

After Silver took a serious hit on the 11th of August, seeing the biggest price decline since Lehman's collapse in 2008, the speech from FED chairman Powell in Jackson Hole could have triggered a sharper decline – but it didn't.

Powell bringing up "average inflation targeting", meaning that the FED will allow inflation to run above the FED target rate of 2% for a period of time, could have been the trigger for a run back towards and above 28.50 USD, levelling the path up to 30 USD. Initially, Silver failed to gain bullish momentum – so, what happened?

Silver with deep run above 30.00 USD – postponed, but not cancelled

The main reason seems to be the relativizing words from FED chairman Powell, that any overshoot of inflation will be moderate and won't last for prolonged periods.

That can be considered another "hit" for Silver bulls after the week before, when the FED Minutes showed that some FOMC members were worried about yield curve control since this could result in excessive balance sheet growth.

In our opinion, one potential driver for the drop in the US-Dollar and for the push higher in precious metals like Gold and Silver was probably especially the rising speculation of highly aggressive and dovish steps from the US central bank.

What's now of special interest is the strong last weekly close and start into the new week of trading.

Here's what we expected:

  • Initially, it really looked as if this could be the trigger for a deeper correction in Silver which would bring the 26.00 USD region back into the focus for market participants
  • As such, a break to as low as 23.00/30 USD seemed likely

However, here's how it has played out:

  • Gold's "little brother" stabilized and brought the 28.00 USD region back into focus.
  • When looking at recent Commitment of Traders data, we can clearly still spot a low net long exposure among large speculators (leveraged managed accounts, CTA's, asset manager)

If this increases, it could result in a push to as high as 30.00 USD and could even trigger further significant gains.

That said, the overall mid- to long-term picture for Silver looks favourable and we are expecting a deep run to above 30.00 USD in the next 6 to 12 months, which may not be very long, given the strong reaction to the "mixed" FED Minutes and Jay Powell's statement in Jackson Hole for Silver bulls.

How to trade Silver in this environment?

Technically and short-term, we see the short-term picture in Silver as neutral between 26.00 and 28.50 USD, but with a bullish touch.

Given recent developments and the potential for disappointment among Silver bulls, a push to above 28.50 USD with an increasing net long position in Silver futures could initiate a very bullish stint, pushing the metal quickly and dynamically towards 30 USD and even higher.

If we instead get to see a surprising drop below 26.00 USD, a re-test of the 23.00/30 USD region could be imminent, but as long as Silver trades on a daily time frame above 23.00/30 USD, our take on Silver stays clearly bullish:

Source: Admiral Markets MT5 with MT5SE Add-on Silver Daily chart (between April 08, 2019, to August 31, 2020). Accessed: August 31, 2020, at 12:30 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of Silver fell by 12.8%. In 2016, it increased by 13.0%. In 2017, it increased by 6.4%. In 2018, it fell by 10.0% and in 2019, it increased by 15.7%, meaning that after five years, it was up by 13.5%.

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