Why is the silver price falling? Sinks further below the pivotal $20 mark

More than a year after the Reddit-fuelled silver short squeeze, dubbed “the world’s biggest short squeeze”, which pushed silver prices up to near 8-year highs, the metal is now trading near a one-month high.

However, the precious metal has recently dipped below the psychologically important $20 per troy ounce level and was trading at around $19.7 per troy ounce, at the time of writing.

Not only that, but silver has also crashed more than 27% since its March highs, seen at the beginning of the Russia-Ukraine conflict, when most precious metals had rallied, as well as about 33% since February 2021 highs. This has largely been due to an escalating US dollar (DXY) and central banks across the world determined to tighten monetary policy to combat decades-high inflation.

Silver recently crossed the 50-day moving average 

Silver has just dipped below the critical $20 level, trading at about $18.6

According to Piero Cingari, analyst for Capital.com, "In contrast to gold, which thrives during periods of recession and stagflation, silver needs a global economic expansion in order to flourish, as it is more frequently employed in industrial production. Silver's major long-term catalyst is the progress toward green transition and growing EVs adoption, with the metal's widespread use in the photovoltaic sector as a key component in solar panels.

However, there have recently been setbacks on this front. China and India are boosting their imports of affordable oil and gas from Russia, filling the void left by Europe, which is struggling with a desperate hunt for energy alternatives and intends to buffer with a return to coal, delaying green transition efforts for the time being. Clearly, there might be incentives to make the changeover, but this will take time.

On September 12, spot silver went up more than 5% to $19.7 per troy ounce in one of the best sessions this year, hitting the highest levels since August 18. Silver’s daily price action broke through both the 50-day moving average and the 2022 bearish trend line connecting the lower highs of April and August.Momentum indicators show the daily RSI spiking above 50 and the MACD providing a bullish crossover last Friday.

The latter has been a reliable bullish technical signal. The May 19 MACD bullish crossover led to a 5.7% rally until June. The July 21 MACD bullish crossover sparked a 12.1% rally to mid-August.The following key resistance levels to keep an eye on are: 20.00 (psychological), 20.8 (August highs), and 21.15 (38.2% Fibonacci of 2022 low to high). The 50-dma at 19.23 now represents the immediate support level on the downside."

Why has the silver price been falling lately?

Silver has recently hit a one-month low and been tracking gold’s footsteps, which recently hit a 3-week low, due to a stronger US dollar (DXY) and rising interest rates by the US Federal Reserve. The US Fed has already raised interest rates by 75 basis points in June, with an identical hike being announced for July as well. The possibility of another 50 to 75 basis points hike in September is increasingly likely as well, after a short break in August. 

 This persistent monetary policy tightening has put precious metals under significant pressure in the last few weeks. The recent FOMC minutes from the US Federal Reserve's July meeting made it abundantly clear that the Fed is not yet done raising interest rates, even as it recognizes the possible threat of looming recession. This has considerably pressured silver prices further.

One of the main reasons silver is so hard-hit at the moment is because it is seen as both an industrial metal as well as a precious metal, so faces the downsides of both. Hence, as a precious metal, it is exposed to the impact of higher interest rates, as an inflation hedge, as well as bearing some of the brunt from gold. But as an industrial metal, it is also exposed to muted industrial and construction demand coming from top consumer China. Furthermore, it is also exposed to spillover from copper,which has only just stabilised at about $3.6 per pound and is still seen as a recession indicator. 

Demand from the solar energy and photovoltaic industry is also considerably muted, as China is currently taking advantage of gas wars between Europe and Russia to purchase as much energy as possible from Russia, to plug in its own energy crisis. This has led to government investment in the solar and renewable energy industry to take a backseat for the time being, also leading to dampened silver prices. However, the recent US Inflation Reduction Act may potentially change that in the coming months, having announced about $430 billion for renewable energy investment. This may go a long way to provide a boost to silver prices in the long-term. 

According to a report by the London Bullion Market Association (LBMA), silver supply has recovered at a much faster rate than demand, with the biggest surge in supply coming from Latin America. This has largely been due to COVID-19 restrictions in countries such as Peru and Mexico, which are some of the major silver producers, being lifted much earlier than the rest of the world.

In 2021, silver production as a by-product from copper mining operations grew by about 9%, whereas primary silver output jumped by about 2%. However, silver demand, especially jewellery demand in top consumers India and China, dropped as in-store jewellery sales fell, due to a number of stores being closed after COVID-19 outbreaks.

 

 

Is the current silver recovery enough? 

Silver was trading at about $19.7 per troy ounce at the time of writing, just a sliver below the critical $20 per troy ounce mark, however was still down about 3% this month, mostly due to the increasing likelihood that the US Federal Reserve will raise interest rates by another 75 basis points this month. This would make it the third consecutive hike of this size and is likely to take a considerable toll on silver prices, pushing them further down. Although there have been a few indications of inflation finally having peaked, they are yet not enough to convince the Fed to slow down their aggressive tightening policy. 

However, there may be a silver lining after all, since China has recently announced a surprise cut in interest rates, in order to further boost its struggling economy, which is still reeling from intermittent lockdowns and rising COVID-19 cases. Since China is a major manufacturer of both electric vehicles and solar panels- both of which use silver extensively- this may potentially spell good news for silver and hike prices somewhat in the coming months. 

 The Bank of England also recently raised interest rates by about 50 basis points, the biggest hike in 27 years, in order to curb soaring inflation, which it predicted would hit about 13.3% in October. However, the central bank also highlighted that it expects the UK economy to be in recession by this December, yet has no choice but to raise rates. This has caused renewed interest in safe haven assets such as precious metals, causing silver to spike as well. 

The US Inflation Reduction Act could also significantly raise silver prices with its $430 billion of investment in renewable energy. Although it is not clear yet how much of that is specifically for solar energy, in which silver is key, it is expected to be quite a significant chunk, which would help silver demand as well. i

Who are the main silver miners affected?

One of the most prominent Mexican silver miners, Industrias Penoles, has fallen by about 43% since its March 2022 highs, with earnings growth lagging behind other companies in the sector. Fitch Ratings has given the company a rating of “BBB”.

Polymetal International (POLY), another major silver miner, has also declined about 84% since February 2022. The company was first sanctioned by the UK and other countries as part of ongoing actions against Russia due to the Ukraine conflict, but is now also facing the brunt of falling silver prices. Currently, the company has a “hold” rating from Berenberg Bank.

Coeur Mining, with operations in Mexico, the United States and Canada has also recently fallen to a one-year low, dipping approximately 45% since April 2022. The company has also announced the sale of its Victoria Gold shares to Cormack Securities.

What is the outlook for silver prices?

China and India together account for approximately 40% of silver fabrication demand. While India’s COVID-19 situation has been improving somewhat over the last few months, China is dealing with a fresh wave of cases.

China is currently also dealing with soaring energy prices, which has caused a number of smelters and mills to shut down. As such the silver outlook for the rest of the year is looking pretty grim, with even lower silver demand, for the short to medium term.

According to the LBMA, this year could also see lower silver demand coming from industrial use, following increasing worries about stagflation, a scenario of reduced economic growth and increased inflation. This is likely to lead to reductions in sales of electronics and automobiles, which drive considerable silver industrial demand.

Mine production in Latin America especially, is expected to keep surging, with global mine output likely to inch up about 3% this year, mainly led by Mexico, Peru and China. This is likely to depress silver prices further, in the short term at least. However, declining supply from Kazakhstan, Russia and Australia are likely to put a floor on prices, stabilizing the silver outlook somewhat.

Silver is now hovering around the $20 per troy ounce range, having recouped some of its losses, but not very much. This has sparked off concerns of it dipping below $20 again in the near future. However, by the end of the year, according to ANZ analysts, silver prices could settle around $26 per troy ounce. Although a number of silver miners are also expected to cut production guidance due to rising energy prices and low demand, the second half of the year is expected to be better than the disappointing first quarter. The rise of the photovoltaic industry could also play a significant role in booting silver prices further.