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Metals insights: a silver breakout? Key factors to consider

Commentaries & Views

Silver futures are on pace for the best month since March, finding tailwinds from its safe-haven and industrial characteristics. It is also on the verge of a decade-long technical breakout, but what will power it to new highs on the year and beyond? Here are the two key narratives I’m watching to align with Silver’s technical setup. Gaining 10.5% through July 19th, it far outpaces Gold’s 2.9%. While a broadly weaker U.S. Dollar and some easing of Treasury yields have supported the precious metals complex, next week’s Federal Reserve meeting certainly poses a risk to the rally. According to the CME Group’s FedWatch Tool, a rate hike next week is fully priced in, but the odds the central bank holds at the newly acquired 5.25 - 5.50% through yearend are 62.5%. This tells me there is room to interpret the bank’s message. I will be looking for strength from the belly of the yield curve, 5-year and 10-year futures in what could be a capitulation in the Treasury market during the month of July. Higher prices, or lower yields, would be seen as a formidable tailwind to Silver’s precious metal characteristics. Industrial demand for Silver has grown to more than half its consumption, and total demand is expected to outstrip supply for the third year in a row. Two increasingly important factors are the green energy movement and China. This often forces silver to take queues from Copper and the Chinese Yuan. A devaluing of the Chinese Yuan is a direct headwind to the entire metals complex as it erodes China’s purchasing power. In the second quarter, the CME Group’s Chinese Yuan contract gained 5.7%, meaning the U.S Dollar strengthened aggressively against the Yuan. Furthermore, negativity towards China’s economy may have hit a pinnacle this week with a slew of banks downgrading 2023 GDP. When positioning, it is essential to understand what information the market has begun discounting and look for opportunities within such. In Silver’s case, it could range from the Fed’s tightening cycle and the rise in yields to the mounting industrial demand and negativity surrounding China. If this fundamental landscape improves and aligns with a decade-long technical setup, it could equate to a powerful move in one of the CME Group’s most powerful assets. 

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