Silver: Worst Month in 3 Years Could Just Be a Start

Charts by SKCharting.com, with data powered by Investing.com

As trading for February neared its close, the spot silver hovered at $20.65 an ounce in Asia Tuesday. Silver futures, on New York’s COMEX, were a smidgeon higher at $20.75. Both were down 14% from the start of 2023, with almost 13% of that loss coming this month alone. That makes February the worst month for silver since March 2020, when it fell 16% amid the global outbreak of the coronavirus pandemic.

With the Dollar Index Futures hitting eight-week highs of 105.315 on Monday on a continued rise in U.S. rate hike expectations, more ill portends for silver, say the chartists. They forecast a drop to the $18 region for the white metal even as its more illustrious ‘cousin’ gold — known as the yellow metal — appears to have a fair chance of beating back bears who want to take it below $1,800.

Prior to its January-February dump, silver rallied non-stop for four months, accumulating a gain of nearly 35%. At that point, the gold-silver ratio — which determines how many ounces of silver one gets for the price of one ounce of gold — stood at $75. On Tuesday, the ratio was back at its long-held 85.

Said Sunil Kumar Dixit, chief technical strategist at SKCharting.com:

“Having declined consistently for seven weeks in a row, silver’s woes are far from over any time soon. Unless we see weekly sustainability above $21.50, we will maintain our bearish outlook for a further drop to $18.80.”

Dixit concedes that oversold conditions that have pushed spot silver’s daily RSI, or Relative Strength Index, to 24 could cause some near-term recovery toward $21.50 as that level coincides with 100-Day SMA or Simple Moving Average.

But the dollar’s strength would ultimately prevail over all metals, with silver seen having a nary a chance to defy the momentum of the greenback, he said.

“The dollar keeps its uptrend with constant support from 5-Day EMA,” Dixit said, referring to the Exponential Moving Average on the currency’s charts.

"As long as the Dollar Index continues above 104.40 and 104.50, silver bears are at ease in doing more damage to the metal. Dollar bulls are targeting the 100-Day SMA of 105.80 and the 200-Day SMA of 106.23 next.”

Fundamentally, silver appears to be at an inflection point over how much it could advance from China’s dropping of its guard over the coronavirus pandemic.

In a late 2022 analysis on silver, Capital.com noted the potential for a surge in economic activity as Beijing transitions from its COVID-zero policy, resulting in “increased silver demand from solar panels, of which China still retains the overwhelming majority.”

Silver is a key element in solar panels due to its usage in photovoltaic power, which drives some of the leading sources of renewable energy globally. With about 20 grams of silver being used in every solar panel, this continues to be a vital source of demand for the metal.

Capital.com noted that China’s share of global solar panel production has risen from about 55% to around 84% in the last 12 years.

Silver is also used in batteries, photography, dentistry, semiconductors, and other industrial applications.

SchiffGold, in an outlook issued Friday, said silver had to get back above $22 to prevent a further onslaught of its price.

Pegging a neutral to bearish outlook for silver, the firm adds that metal’s inability to hold the $22 support was “not a great sign,” although silver in itself is known for its volatility. 

“If it cannot reclaim $22 in short order that would be a bad sign and could see a quick retest of the $20 level.

As the chart shows, the last three years have had a few false moves where silver’s golden cross was quickly invalidated. This leaves room for more caution [for silver bulls] than [those in] gold. For now, too early to tell on this one… next month should have a clearer signal.”

SchiffGold also noted that open interest in silver futures was at multi-year lows and could sink further, complicating any potential rebound:

“Silver will have to rally in the face of higher margin requirements to validate the bull run.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.