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    Silver hit by Chinese growth fears

    Precious metals have been hammered today with silver taking the brunt of the sell-off, down 2%. Such is the sentiment towards the precious metals that they failed to find much safe haven demand when the stock markets and the US dollar sold off last week. But with these assets making a comeback today, gold and silver are going in the opposite direction. This type of a reaction suggests that it would take something huge, say, a Grexit, for the metals to find some notable support. In the absence of this sort of a market-moving event, it is unlikely that gold or silver would find much buying interest for inflation is also non-existent. What’s more, investors still apparently prefer to hold equities – especially in countries where the central bank is still uber dovish, such as Japan and the Eurozone – over precious metals. In the US, the quarterly reporting season has just started and the results have so far been decent; this has helped the S&P 500 to remain near the recent record highs. 

    As well as a precious metal, silver is also widely used as an industrial material. This makes it somewhat sensitive to changes in economic conditions in countries such as China. Last week we found out that output in the world’s second largest economy slowed to ‘just’ 7% in the first quarter. This was the slowest pace of growth since 2009 and perhaps the reason behind the latest easing step from the People’s Bank of China. At the weekend the central bank reduced the main reserve-requirement ratio (RRR) by 1 percentage point to 18.5% for large banks, and lower for rural lenders. As this was the biggest reduction in RRR since the global financial crisis, it clearly suggests that the central bank must be growing worried about the speed of the slowdown in economic activity. If the trend of weaker economic data continues then so too may demand for commodities, including silver.

    Meanwhile from a technical point of view, silver is now approaching the 78.6% Fibonacci retracement level of the upswing from the March low at $15.70. If it gets there, it will also meet a short-term bullish trend line around this level. Thus there is a possibility for a short-term bounce from this technically-important level. But the trend is clearly bearish for not only are the 50- and 200-day simple moving averages pointing lower but price is also currently below both these SMAs. What’s more, the long-term bearish trend line has remained intact for a long period of time now, while the most significant bounce recently only managed a shallow 38.2% retracement (of a much larger price swing) around $18.45 in January. So, taking everything into consideration, the most likely scenario is that the grey metal will break through the short term bullish trend line before potentially heading to much-lower levels over the coming days. The short-term bias for silver would remain bearish while below the $16.50 resistance level. At this stage only a decisive break above the trend line and the prior high of $17.40 would signal a change in the trend.

    The next potential support levels to watch on silver are as follows:

    • $15.30: March low and 78.6% Fibonacci retracement of the XA swing
    • $15.00: psychological support
    • $14.70: 127.2% extension of BC
    • $14.40: December low

    For a detailed explanation of Fibonacci analysis, please read our Ultimate Fibonacci Guide HERE.

    Figure 1:

    Source: Please note this product is not available to US clients

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