Silver Daily Chart Source: Bloomberg, PSR
With the backdrop of rising geopolitical tension between US and Syria and the ongoing trade war scare between US and China, the price action in the safe haven asset class such as Gold and Silver remain rather muted. However, we believe a significant breakout in Gold and Silver is about to happen which should kickstart the next wave of buying.
We will focus on Silver as it presents a better risk-reward proposition over Gold as hinted by the Gold/Silver ratio. The Gold/Silver ratio is currently trading at an extreme high of 80. The Gold/Silver ratio measures the number of ounces of silver one ounce of Gold can buy. For instance, the current ratio of 80 suggests an ounce of Gold is equivalent to 80 ounces of Silver. For the past 20 years, the Gold/Silver ratio has only traded above that level on three occasions where sharp mean reversion eventually took over. The 30 years historical average of the Gold/Silver ratio is around 66. In other words, referencing the average Gold/Silver ratio of 66 and the current Gold price of $1342 would translate into a Silver price of $20.30 (1342/66). Hence, it is a matter of time before we get a stronger rally in Silver.
On the price action front, Silver has been lagging behind Gold. Year to date performance of Gold is +3.1% while Silver is only up +1.5%. Silver has been consolidating in a tight range for the past 11 weeks with $17.00 acting as the range high while $16.20 acting as the range low shown by the highlighted region in the chart.
However, some sign of life appeared recently after Silver broke above the $17.00 range high forcefully on 18 April. With the amount of energy being stored up for the past 11 weeks of consolidation, we believe this rally is only beginning, and a stronger move higher is about to happen. The bulls should be aiming for the $17.70 resistance area next followed by $18.65 after this bullish breakout. Moreover, the current environment of heightened uncertainties from geopolitical fears and a weakening dollar trend should also act as a tailwind for the safe haven assets.
From a longer-term perspective, the 200 Month moving average has been acting as a solid floor since November 2016, preventing Silver from falling lower. In total, the 200 Month moving average succeeded in halting the selloff for past 13 occasions justifying the importance of that level. Keep a close lookout for the 200 Month moving average as that will dictate if Silver turns into an uptrend or not. More specifically, the 200 Month moving average is coincidently at the $16.20 range low level as well, making that level a stronger base. Hence, we expect limited downside in Silver with the $16.20 range low and 200 Month moving average acting as the solid base.
On the flip side, with Silver currently breaking out of the $17.00 range high, Gold should also follow the lead and break above the $1360 range high soon. Next target for Gold after the breakout is the $1391 resistance area followed by $1433. All in all, the near-term price action in both Silver and Gold looks bullish.