Could silver test the $26 level as China resists bringing lockdowns back?
13:32, 4 January 2023
Silver prices have been on the rise for the last few days, as the precious metal traded at about $24 per troy ounce, with an increase of about 1.3% on Wednesday morning. Silver recently gained significantly in expectation of Chinese authorities' ongoing attempts to reopen the economy. In the last 18 months, silver stocks at the COMEX fell by 70% to just over 1 million tonnes, and stocks at the London Bullion Market Association dropped sharply amid outflows to India.
Could silver touch the $26 per troy ounce level once more?
Before the start of China’s rigid zero-COVID-19 lockdowns and regulations, silver had regularly been trading above the $26 per troy ounce level, especially in August 2021 and earlier. However, ever since the start of the Russia-Ukraine conflict in February 2022, silver had been struggling, with the last breach above $26 being in April 2022.
At the moment, investors are now much more hopeful that the precious metal may once again breach this key resistance level in the coming months, largely due to China. This is because despite an alarming number of rising COVID-19 cases in China, the government is still very reluctant to bring back mass lockdowns.
This has led to widespread speculations of China potentially attempting to speed up herd immunity, in the hopes that they may soon see the end of business and economic disruptions due to the coronavirus this way.
This has gone a long way in boosting silver prices already, as China is one of the largest consumers of gold and silver jewellery in the world. This is in addition to being a significant producer of the metal, most of which goes right back into the country’s own vast manufacturing and industrial networks.
As of 2021, China produced about 3.34 thousand metric tons of silver, according to this report, making it one of the largest silver producers in Asia. Apart from jewellery demand, silver is also used extensively in several Chinese industries, such as solar panels, dentistry, photovoltaics and much more.
Furthermore, a weaker US dollar (DXY) has also contributed to keeping silver prices up. This has gone hand-in-hand with expectations of the US Federal Reserve also slowing down its pace of interest rate hikes in the coming few months.
This was spurred by the central bank opting for a 50-basis points hike in December, instead of another 75-basis points, as was seen in the last several FOMC meetings. This move has gone a long way in giving rise to hope that interest rates might continue to come down as the year progresses.
Silver prices have also been hugely supported over the last few weeks due to continuing tight supplies in major warehouses, with COMEX silver stocks having falling to about 1 million tonnes, a dip of over 70% in the last one and a half years.
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Silver technical analysis
At the time of writing, silver prices were trading at about $24.2 per troy ounce more than 17.5% above its end of November lows, as well as over 38% from the beginning of September lows. However, the precious metal was still down about 10% down from the peak seen in early March, at the beginning of the Russian conflict.
Currently silver is at a more than 8-month high, trading at the highest level since the end of April 2022. It recently saw a golden cross on December 20, with the 50-day moving average rising above the 200-day moving average, indicating the start of a period of upturn.
Coming to the next resistance level, silver could potentially be testing the $26 per troy ounce level in the near future, which was last seen in April 2022, followed by the $28 per troy ounce level, last seen in June 2021.
The next support level, on the other hand, could be about $22 per troy ounce, last seen on December 20, followed by $20 per troy ounce, last seen on November 29.
Silver saw its last golden cross on December 20
Silver saw its last golden cross on December 20 – Credit: TradingViewWhat is the outlook for silver?
Silver’s outlook in the coming few months depends heavily upon how China handles the number of rising COVID-19 cases. If it chooses to reinstate mass lockdowns, silver could once again see losses as revenues from in-store jewellery sales as well as declining industrial production make themselves felt.
However, if China continues along its current path of seemingly wanting to achieve herd immunity, silver could continue to benefit from resuming industrial activity and sales. Furthermore, investors are keeping an eye on the rate and pace of the US Federal Reserve and other central banks’ interest rate hikes in the coming months, due to how they are likely to affect precious metals and other commodities.
The progress of the Russian conflict is also a key factor for metal prices, as currently silver is also seeing some safe haven demand, as the crisis rages on. This is also likely to continue due to expectations of slowing global economic growth this year, as well as a mild recession.
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