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Is silver a buy after a technical golden cross?

17:32, 3 June 2022

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  • Silver
    Silver
    20.436 USD
    -0.267 -1.290%
  • Gold
    Gold
    1710.84 USD
    -7.82 -0.460%

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Silver bars on blue background with growing graph
On a fundamental standpoint, silver prices tend to lag behind gold prices - Photo: Shutterstock

Silver experienced a technical “golden cross” this week, which happens when the 50-day moving average (MA) crosses above the 200-day MA, reflecting a recent positive momentum. The last time a golden cross appeared on the daily chart of silver was in early July 2020, and the commodity increased by 60% the following month.

Silver prices began an upward trend starting in early February, extending to around $27 per troy ounce on 8 March, and then falling due to the rise in US real yield supported by the Federal Reserve’s hawkish stance on interest rates.

On a fundamental standpoint, silver prices tend to lag behind gold prices, as Goldman Sachs recently argued, and there may be still untapped investor demand to hedge geopolitical risks and inflation in the coming months. In the long term, the switch to green technologies, such as photovoltaic cells for solar panels, and its widespread usage in electronics, might raise silver demand even more, but reserves discoveries may also keep the supply well supported.

However, as we've seen in recent weeks, rising real interest rates in the United States act as a brake on the rise of precious metals like gold and silver. In this case, only a further rise in inflation expectations or a drop in long-term Treasury yields may prove to be supportive for the precious metal.

From a technical point of view, prices have continued to trade in a fairly tight range between $24.5 and $25.5 per troy ounce over the past week. This has allowed silver prices to remain above 50% of the Fibonacci retracement level, avoiding reversing the current trend.

Silver fundamental analysis: metals don’t like higher US real yield

a chart showing the negative relationship between US real yields and silverNegative link between Silver and US 10-year real yields – Credit: Capital.com / Source: Tradingview

Silver prices have risen by 9% since the start of 2022, broadly matching gold’s performance, driven mainly by rising market inflation expectations and higher geopolitical risks following the Russia’s invasion in Ukraine.

The US five-year breakeven rate, a gauge of how much the market anticipates inflation to run on average over the next five years, has hit its highest level ever, reaching 3.5% from 2.8% at the beginning of the year, conveying greater investor demand for precious metals.

However, the Fed's recent pledges of quicker and more aggressive interest rate rises have pushed up real yields in the US, which have traditionally been a drag on the precious metals rally.

Gold

1,710.84 Price
-0.460% 1D Chg, %
Long position overnight fee -0.0052%
Short position overnight fee 0.0019%
Overnight fee time 21:00 (UTC)
Spread 0.20

Oil - Crude

87.90 Price
+0.560% 1D Chg, %
Long position overnight fee 0.0242%
Short position overnight fee -0.0436%
Overnight fee time 21:00 (UTC)
Spread 0.03

Natural Gas

7.14 Price
+0.850% 1D Chg, %
Long position overnight fee -0.1719%
Short position overnight fee 0.1271%
Overnight fee time 21:00 (UTC)
Spread 0.005

Oil - Brent

93.63 Price
+0.390% 1D Chg, %
Long position overnight fee 0.0469%
Short position overnight fee -0.0721%
Overnight fee time 21:00 (UTC)
Spread 0.04

Precious metals are assets that do not offer fixed returns, and therefore when real interest rates rise investors are more tempted to move elsewhere.

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Where is silver headed to?

  • According to Goldman Sachs, silver price rises lagged those of gold during the precious bull markets of 2016, 2019, and 2020. This occurs because silver is seen as a means of diversifying gold holdings. According to Goldman Sachs, silver prices could reach a target $30 by 2022.
  • According to a Degussa Economic Market report, central banks are unlikely to reduce inflation to around 2% any time soon, and owning some physical gold and silver is a long-term investor's alternative for protecting an investment portfolio from inflation concerns.
  • MKS Pamp Group takes a more cautious stance, arguing that although the price of gold could assist silver, industrial demand would be depressed as gross domestic product (GDP) slows and inflation remains stable, while it continues to cope with extremely large known and undiscovered above ground reserves. MKS increased its silver price target to $25/toz in 2022, but expects a consistently higher gold-to-silver ratio in this uncertain macroeconomic environment.

Silver technical analysis: golden cross prelude to a rally?

a chart showing the technical golden cross on silverTechnical golden cross on silver daily chart – Credit: Capital.com / Source: Tradingview

On the technical analysis front, the most relevant signal is the formation of the golden cross on the daily silver chart, as the 50-day moving average (MA) has exceeded the 200 MA. The last golden cross on silver occurred in early July 2020 and the metal grew by more than 60% in the following month.

The Fibonacci analysis, taking the highs and lows of 2022, shows that prices have pulled back to the 50% retracement level, and are currently trading close to the 61.8% level.

Support at 24.5 proved to be solid enough to prevent prices from reversing the ongoing bullish trend.

The next resistance is at 25.87 (78.6% Fibonacci) and then 26.91 (100% Fibonacci). The extension beyond that threshold would indicate the level of 29.94 (161.8% Fibonacci), in line with the highs reached in February 2021 and August 2020.

Looking down, a break below 24.47, could drag silver to 23.90 (38.2% Fibonacci) and then 23.181 (23.6% Fibonacci). The region between 21.95 and 22 marks the 2022 lows, and a break below might reinstate the support of 21.46, which corresponds to the December lows.

Before investing in any asset, always do your own research or contact your financial adviser before arriving at a decision. Remember that your decision should be based on your attitude to risk, your expertise in this market, the spread of your portfolio and how comfortable you feel about losing money. Never invest more than you can afford to lose and keep in mind that past performance is no guarantee of future returns.

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The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
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