Looking back at January 2020
Silver began 2020 at $17.85 an ounce – a far cry from its 2019 peak of $19.6. Last year, silver gained 15 per cent, while the price of gold increased by 19 per cent. Fast-forward to February 10, 2020 – and we are still at $17.80 (see this video for an in-depth silver chart analysis for February). Does this mean that the market remained calm and stable? Not at all.
In fact, January was a tumultuous month for silver and other precious metals. First came the US-Iran crisis. When general Qassem Soleimani was killed in a US airstrike, nobody knew how Iran would react. There was even talk of a new world war. Naturally, investors rushed into safe-haven assets – mainly precious metals. Palladium hit a new all-time high, gold shot up 3 per cent, while silver peaked at $18.41.
Once it became clear that there wouldn't be a war, the price started sliding back down. But just a few days later, the Covid-19 virus struck. The uncertainty drove investors into precious metals, though the coronavirus impact on silver prices was less than that on gold. On Jan 27, the price tested $18.34 several times but was rejected. January ended with a new rally to $18.04 as the World Health Organisation declared the coronavirus a global health emergency.
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Price dynamics on Feb 1-10
The first week of February resulted in a 1.8 per cent drop for silver – from $18.04 to $17.71. Gold was down, too, but only by 1 per cent. One of the reasons that silver is growing slower than gold – and falling faster – is that the US dollar is quite strong at the moment. It makes silver relatively expensive.
After February 7, the virus outbreak seems to have passed its peak, at least in Hubei. Even though February 9 saw a record number of deaths on one day (97), the overall number of new infections began to stabilize. Unsurprisingly, the outcome of the impeachment trial in the US didn't have any visible effect on silver and other markets: everyone expected Trump to be acquitted.
On Monday, February 10 the extended Lunar New Year holidays finally ended and people across mainland China went back to work. Silver was trading at $17.74 – a 1.7 percent decline since the beginning of the month.
Silver price forecast for February 2020
Bulls and bears seem to be quite evenly positioned at the moment. For the past six months, silver has been going through a period of consolidation. Silver chart technical analysis also reveals a bullish flag forming. The next important resistance level for the bulls awaits at $18. As for the bears, they will try to push through $17, though the support is pretty strong.
Looking at the fundamentals, we can identify several short-term factors that can positively influence the price of silver in the second half of February:
- Panic abating. Silver is different from gold in that roughly 50 per cent of the demand for it comes from the industry. Apart from tableware, silver is used in making mirrors, batteries, electric contacts, LED screens, etc. So if the coronavirus outbreak stabilises, silver prices will grow, just like other commodities that have suffered in the past month. At the same time, silver will also look less attractive as a safe haven asset, but this effect will probably prove less significant.
- Rebound in base metal prices. Experts point out that silver has become more sensitive to the price of base metals, especially copper. Correlation coefficients above 0.5 are quite common. With the coronavirus fears decreasing, the prices of metals like copper, nickel and aluminium will bounce back. All these commodities have strong fundamentals at the moment, and the virus is the only thing holding them back. As they appreciate, so will silver.
- Friendly seasonality. Late February is traditionally a good period for silver, and this effect is giving the price a slight additional boost.
Looking further forward
From March 2020 onwards – and with the outbreak hopefully contained – silver prices can test higher values. The first breakout level to watch out for is $22, followed by $27.1.
In summer, the price dynamics can undergo serious shifts for the following reasons:
- Recovering demand in China. China is the world's second-largest consumer of silver after the US, accounting for 15 per cent of the demand. So the anxiety that China's economic growth will slow down because of the virus has hit silver prices just like it did copper and nickel.
It will take a few months to evaluate the damage to the Chinese economy and calculate the growth rate for 2020. So we'll probably have to wait until summer to feel the positive effect of the recovery on silver prices.
- Seasonality. Statistically, bears rule the show in the silver market between early March and late June. This has happened 36 times in the last 47 years. If this trend holds in 2020, we can see strong growth starting from July.
- High gold-to-silver ratio. Silver is extremely undervalued right now. It would take 88 ounces of silver to buy one ounce of gold – this is called gold-to-silver ratio. The average value in the past 20 years was 60:1. Whenever there is a strong spike, the ratio eventually retraces to the average. We might see that happening in 2020.
- Supply-demand imbalance. The demand for silver has been rising since 2013. At the same time, supply is falling, with all top 10 silver-producing countries mining less every year.
Some of these factors will have an impact sooner than others. However, the overall outlook for silver is bullish.
Silver prices might rebound in late February, but in spring continued worries about the economic growth in China, together with the seasonal effect, will prevent a price breakout. The situation can improve in summer, once the coronavirus is fully under control and demand in China recovers. For now, the undervalued silver remains a good buy - but make sure to follow Capital.com for the latest silver market news and analysis.
Contributor: Alisa Orlova