Silver shines alongside Gold; Oil rises as tensions in the Middle East escalate
14:38, 18 October 2023
In times of uncertainty, silver is usually overshadowed by its flashier cousin as markets perceive gold to be the ultimate safe haven. But the precious metal also enjoys an increase in demand when traders are looking to potentially safeguard their capital.
XAG/USD has enjoyed a healthy rally over the past two weeks as the path of least resistance turned higher. The momentum hasn’t been as strong as in gold (XAU/USD) with a few tests and sideways consolidation along the way, but the pullback in the weeks prior was also more contained than with gold.
Gold (XAU/USD) and US yields inverse relationship
Silver has its uses in industrial production, which means it is more sensitive to the economic cycle than gold. This explains why the recent pullback was more limited. Gold, as a non-yielding asset, usually underperforms when yields are rising because investors can get a higher return elsewhere. Yields usually rise when the economy performs well, which acts as a double-edged sword for the precious metal because its appeal as a safe haven also diminishes during those times, meaning investors usually reduce their gold positions in their portfolios. Silver, on the other hand, also sees reduced demand when the economy performs well, but given its industrial use, it usually sees less bearish sentiment because a stronger economy is likely to increase industrial production and therefore demand for silver.
Looking at the chart, XAG/USD had recently dipped below the lower bound of its descending channel, but sellers were challenged just above the 20.50 mark as the selloff was looking overextended with the RSI being the most oversold since February. The recent attacks in the Middle East have put investors on high alert, and whilst markets have largely shown little impact over the past two weeks, the momentum in precious metals suggests there is a good amount of safe haven demand even if concerns are not yet peaking. This contradicts the recent US data which would steer investors towards higher-yielding assets, like bonds, but the path of least resistance for both gold and silver looks set to continue higher in the short term. At least until there is some further clarity on the geopolitical concerns.
Silver (XAG/USD) daily chart
Oil has been another asset that has benefited from the recent events. Despite failing to sustain the momentum seen earlier in the week, Friday’s rally in oil prices reset the appetite for further bullish moves. The $90 mark sits back in sight for US crude (WTI) whilst Brent crude attempts to break above $92.
It’s feared that the escalating conflict in the Middle East may disrupt exports of oil, despite neither Israel nor the Gaza Strip being big oil producers. But neighbouring countries like Saudi Arabia account for almost a third of world exports, and so traders are gearing up for the possibility of a wider-region impact, regardless of how limited it may seem at present. Iran has also called for an oil embargo on Israel over the bombing of northern Gaza. So far, OPEC+ is not planning to take any immediate action as it does not consider itself a political organization.
On the charts, WTI is setting up a strong bullish pattern but there is likely to be continued resistance up ahead. The RSI has recently crossed the 50-line suggesting there is further room to go in the bullish formation before the rally seems overextended. That said, any significant daily moves – like the one seen on Friday – is likely to bring some consolidation and minor reversal as stops are triggered and interested sellers try to get in at more favourable levels.
WTI daily chart