Silver prices see short squeeze, testing resistance near $20, up 6% on weak dollar
Silver is seeing a solid breakout move and, according to some analysts, could be in a position to push back above $20 an ounce, which has been an important psychological level through the summer.
Monday's rally is a solid reversal of fortunes after prices fell to a two-year low below $17.50 an ounce at the start of the month. December silver futures last traded at $19.91 an ounce. Silver is seeing its best day since late-July when markets started prematurely expecting the Federal Reserve to pivot and slow the pace of its aggressive monetary policy stance.
According to analysts, silver is benefiting from a sharp drop in the U.S. dollar, which hit a fresh 20-year high last week. Analysts said that fuel added to the rally is significant bearish short positioning in the market. The rally is forcing investors with short positions to cover at higher prices.
"With money managers' short positioning in silver having grown to its highest levels since 2019, a consolidation lower in the USD has sent participants rushing for the exits," said commodity analysts at TD Securities.
However, TDS remains bearish on the precious metal as they expect growing recession fears to weigh on silver's industrial demand.
"With 54% of silver's demand tied to fabrication, silver remains highly sensitive to our deteriorating gauge of commodity demand. Overall, we continue to expect that while rates markets appear to be nearing a fair pricing for Fed funds, precious metals' price action is still not consistent with their historical performance when hiking cycles enter into a restrictive rates regime," the analysts said.
TD Securities has been tactically short silver since mid-August.
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Along with benefiting from a weak U.S. dollar, Nicky Shiels, head of metals strategy at MKS, said silver is playing catch up after being significantly undervalued compared to gold. Recently the gold/silver ratio has been trading near its highest level in two years.
Shiels added that silver has room to run higher in the near term, but this rally might not be sustainable.
"Silver can run to the upside, but don't see it outperforming from a macro-perspective in medium-term so long as US$ is king keeping risk appetite at bay," she said in a research note Monday. "Silver squeezes usually occur when dislocations arise and there is clearly a disconnect between front month physical (backwardated) led by very strong physical (East & NA) demand, investor sentiment/positioning."
Philip Streible, chief market strategist at Blue Line Futures, said that the U.S. dollar will be critical to sustainable gains in silver. He added that many investors continue to focus on Tuesday's inflation data.
Economists have said that a drop in the U.S. Consumer Price Index could start to shift U.S. monetary policy expectations. Weak inflation data could prompt the Federal Reserve to slow its rate hikes through the rest of the year. However, markets still see a 92% chance of a 75 basis point rate hike later this month, and the CPI data is not expected to change that.
"Any weak inflation data this week could cause further selling pressure in the U.S. dollar and then we could easily see silver prices back above $20," said Streible.
Streible also reiterated his stance that investors see more value in silver than gold.
"You have never gone wrong buying silver when the ratio is above 95 points," he said. "That trend goes all the way back to the 1980s."