Silver price analysis for December 2020: is the market at a turning point?
18:27, 7 December 2020
The silver market staged an impressive rally over the summer, soaring by 149 per cent from March 2020 lows to reach a seven-year high in August 2020, approaching $30 per ounce. But the price then dropped back by 23 per cent to return to the $22.50 level at the end of November 2020.
What does that mean for the silver price in December 2020? Is there scope for further downside or is the market presenting a buying opportunity?
Read on for the review of the market's recent performance and a video in which Capital.com’s chief market strategist, David Jones, provides a detailed silver chart analysis and a suggested trading setup.
Silver news: precious metals fail to react to dollar decline
Market observers had expected the silver price to strengthen after the US presidential election, but the market declined in November after an initial spike. The gold price followed, keeping the gold/silver ratio – the number of ounces of silver required to buy one ounce of gold – close to 79 in November as it had been in October.
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The daily average volume of silver cleared through the London Bullion Market Association (LBMA) in October decreased by 21.5 per cent to 226.7 million ounces, according to the latest data. That was its lowest level since August 2019, as trading interest fell after the highs of the summer. The value transferred decreasing by 26.5 per cent to $5.5bn.
In the run-up to the US election many analysts expected that, if Democratic candidate Joe Biden won, the dollar would weaken at the prospect of the new administration passing another round of economic stimulus. Precious metals prices typically trade in an inverse relationship to the dollar, indicating that silver would rise. However, while the US Dollar Index has fallen by 3.6 per cent since the start of November to approach 90, a near three-year low, there has not been a corresponding move in the silver price.
While the dollar fell, the silver price started November at $24 per ounce, dropped to $22.50 per ounce by the end of the month, then bounced back up to $24 per ounce at the start of December.
Industrial demand would also suggest silver has upside potential. Consumption in industries such as electronics, solar panels and water purification accounts for around two thirds of the silver market and it is recovering after the manufacturing sector shut down during Covid-19 restrictions. There is more optimism about the health of the global economy in 2021 after several pharmaceutical companies announced successful vaccine trials.
The Caixin purchasing managers’ index (PMI) increased from 53.6 in October to 54.9 in November, the fastest improvement in conditions since November 2010. A number above 50 indicates growth in manufacturing activity, while a number below 50 denotes a contraction. The health of the sector in China has improved for seven straight months, indicating a “sustained and strong recovery” from lockdowns earlier in the year.
The uptrend in the silver market this year has typically seen the price rally after a dip, but has the momentum now faded?
Check out this silver price analysis video where David Jones, Capital.com’s chief market strategist looks at whether there is a trading opportunity at current levels.
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Silver price analysis for December 2020: is it time to buy ahead of higher prices in 2021?
The long-term downtrend for silver has broken this year after it bottomed out at $12 per ounce in March. Some analysts remain bullish on the outlook, with forecasts up towards $30 per ounce like ANZ, while the likes of ABN Amro expect the price to stabilise around current support.
Silver technical analysis shows there is strong support at $21.65-22 per ounce. The relative strength index (RSI) went to oversold at the end of November for the first time since September and the price edged below the Bollinger bands, also suggesting it was oversold. The moving average convergence divergence (MACD) lines have been converging towards a buy signal.
However, when there is so much certainty that an asset price will move in a certain direction the market can defy expectations. If there is a much deeper selloff the silver price could fall back to $18 per ounce. The aggressive trade is to be a buyer with a stop-loss in place on the other side of $21.30-21.50 per ounce.
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Ole Hansen, the head of commodity strategy at Saxo Bank, said: “Gold and silver once again do what they do best, i.e. frustrate investors. While the hopefully successful rollout of vaccines next year will support growth and the stock market, we also see tailwinds for investment metals. The dollar is likely to weaken as investors look to emerging markets for better opportunities, not least if bond yields climb thereby strengthening the rotation to value from momentum.”
“With former Fed Chair Janet Yellen likely heading into government as Biden’s pick for Treasury secretary, the doves will fly, both in government and at the Federal Reserve. With this in mind we are likely to see more, not less stimulus over the coming months. Such actions may increase the risk of central banks overcompensating, thereby reigniting the reflation trade.”
Phillip Streible, chief market strategist at Blue Line Futures, commented in a recent silver analysis: “Why did so many people throw in the towel this week on gold and silver? They believe with a rollout of Covid-19 vaccines; the global economy will recover faster, curbing the appeal for Government bonds; therefore, pushing yields higher and chasing riskier assets."
“I will predict that they eventually come crawling back into the market at much higher levels. They forget that policymakers will provide additional fiscal and monetary support, in return pushing inflation expectations much higher. They also forgot that the US dollar would most likely fall another 5-10% against its currency peers, leaving the Euro/USD at 1.25. They also forgot about the pledged Green spending plans in China, Europe, and the US, along with its impact on the price of silver.”
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