Silver price: XAG technicals, fundamentals align, SLV inflows rise

Silver price is doing well this year even as other industrial metals like iron ore and copper crash. It has jumped by 25.50% this year, beating gold, which has risen by 22.5% and currently sits at a record high.

In contrast, copper, a common barometer of the health of the global economy, is in a bear market after falling by over 20% from its highest point this year. Iron ore, which is used to make steel, has plunged by over 32% from the year-to-date high.

While aluminum has risen recently, it remains 10% below the highest level this year. Other metals like nickel, lithium, and cobalt have also retreated.

Global economy is softening

Industrial metals have plunged as concerns that the commodity supercycle that happened after the Covid-19 pandemic has ended. Indeed, most commodities, especially agricultural ones like corn, soybeans, and wheat have all dropped sharply this year. 

Metals have dropped as concerns about the Chinese economy continued. The most recent concern was reported on Wednesday when the FT noted that the $70 billion fund that China promised to deal with the housing crisis was off to a slow start. 

According to Beijing, local governments will use these funds to complete the unfinished houses and then lease them as social housing. However, only a small amount of the funds have been disbursed, meaning that the sector’s recovery will take longer to recover.

China is an important country in the metals industry since it is the biggest industrial country in the world. For example, it buys more than 60% of all iron ore produced globally.

China is also a big buyer of silver, a metal used to make various things like jewelry, solar panels, and in electric vehicles. Silver has a role, albeit a small one, in the creation of high-performance computing chips. 

Therefore, silver price has done well because of the rising demand and slow growth in mining and recycling production. Data by the Silver Institute estimates that silver’s total supply for the year will be 1 billion ounces. Mine production is expected to drop by 1% to 823 million ounces while recycling will be 178 million.

Demand, on the other hand, is expected to do well. The institute estimates that demand will rise to 1.26 billion ounces, leaving the industry with a 265 million supply deficit. As with other sectors, silver does well when there is strong demand than supply.

Silver and the Federal Reserve

The XAG price has also done well because it is always seen as a cheaper alternative to gold, the biggest precious metal in the world. 

Gold has jumped to a record high and was trading at $2,500 on Wednesday. Therefore, some retail investors believe that buying silver, which goes for less than $30 is a better alternative.

This trend is seen in the ongoing ETF inflows. Data shows that the iShares Silver ETF (SLV), which tracks silver, has added over $902 million in assets this year. Most of these inflows have happened in the last three consecutive months, bringing total assets to over $13 billion. 

The other main catalyst for the silver is the ongoing hopes that the Federal Reserve will start cutting interest rates soon. In most cases, silver does well when the Fed is slashing rates, as we saw during the Covid-19 pandemic.

Therefore, the upcoming Jackson Hole Symposium will be important for silver, gold, and the US dollar. In it, the Fed Chair will likely confirm that the bank will slash interest rates in September, which explains why the US dollar index (DXY) has tumbled to $101. 

Silver is also reacting to the soaring US public debt, which has jumped to a record high of over $35.1 trillion. With the election cycle continuing, Donald Trump and Kamala Harris have not delivered actionable plans to lower the country’s deficit.

In fact, in this case, Kamala Harris has at least addressed the issue by committing to increase corporate tax rate to 28%, a move that would slash debt by over $1 trillion in a decade. However, that measure will not pass unless Democrats win the Senate and the House of Representatives, which is unlikely.

Soaring debt and persistent inflation has pushed more investors to gold and silver, which are seen as safe assets.

Silver price forecast

Silver’s weekly chart is a goldmine for technical analysts. The chart shows that silver formed an inverse head and shoulders chart pattern, which often leads to more upside. It has also formed a cup and handle chart pattern, with the recent pullback being the handle section.

Silver remains above the 50-week moving average. It has also formed a falling broadening wedge pattern. Therefore, there is a likelihood that silver will bounce back in the coming months. The initial target will be the year-to-date high of $32.46. A move above that level will see it rise to $35.