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Silver: key hurdles looming for shiny metal

Silver has enjoyed a generous eleven per cent rally from its low this month. The grey precious metal has even outperformed gold, which has climbed by about 5 per cent from its base.  Silver has obviously risen from a lower base which is why it appears to have done better in percentage terms. Unlike gold, silver has a dual role as a precious metal and also an industrial material. This makes silver more appealing when the global economy is expected to do well, as manufacturing activity also tends to pick up. Although the recent manufacturing data out China has been far from convincing, things could change pretty quickly with the euro zone economy finally starting to show signs of growth. The ECB and most other central banks’ accommodative monetary policies, combined with the weaker oil prices may help to fuel economic growth not just in the single currency bloc but elsewhere, too. This will only help to boost the appeal of silver. But this process may take a long time to come to fruition. Thus, there is a possibility that silver prices could fall further back before staging a more profound recovery. But for the time being though the retreating dollar is helping to keep the metal elevated.

Meanwhile the short-term technical outlook for silver is looking somewhat more constructive after the recent upsurge. As can be seen on the chart, the grey metal has found strong support from the key $15.00/30 support area for at least the third time now. In fact, silver may have already formed a long-term base around this area after creating an apparent reversal pattern at the end of last year: a false breakdown. The subsequent rally from this area eventually ran out of steam in January at $18.45 where the long-term 38.2% Fibonacci retracement level offered strong resistance. Silver then moved lower from there and eventually dropped all the way back to $15.30 a couple of weeks ago before bouncing back once more.

Now, the most recent rally has seen silver move back above the 50-day moving average and also resistance at $16.85, a level which this morning turned into support. The path of least resistance is clearly to the upside for now. But the grey metal could be heading into a danger zone. As can be seen on the chart, a bearish trend line comes into play between the prior high of $17.45 and the 61.8% Fibonacci level at $17.30. If silver does not run into resistance there, then it may make a move towards $17.80 where the 78.6% Fibonacci retracement converges with the 200-day moving average. Beyond this level is the January high of around $18.45. Meanwhile if silver goes on to break back below the aforementioned support level of $16.85, then this could give rise to further follow-up technical selling.

Figure 1:

Source: FOREX.com


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