Silver price falls below $19 again and could continue to struggle as Fed raises rates
While silver has managed to bounce off its session lows, the precious metal continues to see significant selling pressure as prices remain below $19 an ounce, trading at a new 2.5-year low.
"The silver market has completely collapsed in its inability to find a bid in the current market environment," said Ole Hansen, head of commodity strategy at Saxo Bank.
The comments come as silver prices last traded at $18.945 an ounce, down nearly 1% today. Some analysts are looking for the precious metal to test support at $18.00 an ounce in the near term.
According to analysts, silver suffers as the juggernaut U.S. dollar continues its rally, trading at a fresh 20-year high. At the same time, the precious metal is also following industrial metals lower as recession fears continue to grow. Along with silver, copper prices have dropped below critical support at $3.50 a pound, falling to their lowest level since November 2020.
Although silver is an important precious metal, 60% of demand comes from industrial uses.
Market analysts note that the factors weighing on silver are driven by the Federal Reserve's monetary policy stance. The U.S. central bank continues to pursue aggressive rate hikes to bring down unprecedented inflation. The Federal Reserve is leading global central banks in rate hikes, which is helping to support the U.S. dollar; at the same time, the central bank's focus on inflation over growth is increasing concerns that it will push the economy into a recession.
Currently, markets expect the Federal Reserve to raise the Fed Fund rate by another 75 basis points later this month.
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Growing recession fears can be seen in the bond market as breakeven levels, which measure the difference between nominal and real yields, continue to decline. Tuesday, the five-year/five-year forward breakeven rates fell to 2%, its lowest level since March 2021.
Analysts at Heraeus noted that silver investors have turned into outright sellers according to silver-backed exchange-traded funds. The European firm note that $1 billion of silver has flowed out of global ETFs since May.
"Investor sentiment for silver has been weakening with the price, as demonstrated by declining ETF holdings. Since the start of May, more than 65.6 million ounces have been removed from ETF holdings, 13 million ounces of which was on 6 July following a 5.1% drop in the silver price during the prior trading session," the analysts said.
Commodity analysts at Commerzbank noted that speculative positioning in the silver market also shows investors have, for now, given up on the precious metal.
Although the silver market faces many challenges in the near term, there is still some optimism that markets can turn around. Commerzbank added that the market has priced in a lot of bad news and the recent selling could be seen as a capitulation move.
"Net short positions are at their highest level in silver in a good three years," the analysts said. "In the past, such a negative stance has often been an indicator of an upcoming trend reversal."
Commodity analysts at Blue Line Futures are also optimistic that silver can turn around. The analysts said that they will be watching Wednesday's inflation data closely.
There are growing expectations that the June Consumer Price Index will show consumer prices rising 9%. Analysts have said that higher inflation could cause investors to question the Federal Reserve's ability to bring down inflation.
Blue Line Futures is looking for silver prices to hold support around $18.78 an ounce.
"At the end of the day, they must respond. Meagerly lingering at these levels is not enough; buyers must come in and defend such support. We believe this answer will be defined [through Wedneday]," the analysts said.