Silver rallies into four-month high

Precious metals have been on the front foot over the course of the past month, with risk-on sentiment helping to lift a sector that has switched from being a perceived haven to one that does well as markets push higher. That has been primarily driven by the fact that this crisis is inflation focused, thus bringing higher rates during an economic crisis. Hence money has primarily pushed into the dollar rather than the likes of gold and silver. However, that relationship between silver and inflation does signal the potential for another surge once we exit the other side of this crisis. The past two recessions have marked the beginning of a protracted bull run for silver, and that could easily be the case once again here. The dollar strength borne of higher interest rates does come into question once we see inflation drop to the degree that the Federal Reserve can turn the taps back on once again. That push to restart the economy once again will likely bring about a major decline for the dollar. Such a move would similarly bring about a push into precious metals.

Silver at risk of further weakness for now

There is a significant degree of risk that we see further downside for stocks as we move forward, with fears around sticky inflation, elevated rates, and a drawn-out recession bringing pressure for stocks. That similarly could put pressure on silver until we see a period where central banks start feeling confident enough to start thinking about cutting interest rates. The weekly chart highlights how the current rise is therefore something that could be short-term in nature. For now, we have trendline resistance coming into play at a historically significant zone of resistance between $21.66-21.43. Beyond there, we could start to see a wider retracement of the $26.95 selloff, with $23.36 to $24.73 coming into play if a protracted year-end rally in stocks takes hold. Nonetheless, near-term upside looks unlikely to last, with the full bull run likely to occur once the true Fed pivot comes into view.

The daily chart highlights how this recent rebound in silver has taken us into a crucial zone of resistance, with the 200-SMA and ascending trendline providing a major hurdle for the bulls. The overbought nature of the stochastic oscillator brings the potential for a sell signal once the line crosses back below the 80 threshold.

It is always worthwhile noting whether gold or silver is the better investment at any given point in time. That is best highlighted by the chart below, with the price of gold and silver overlayed by the silver/gold ratio. What we can clearly see is that silver outperforms at times where the market is moving higher, while gold outperforms at times of weakness for precious metals. This is somewhat intuitive given that we would expect to see greater volatility for silver over gold. As such, percentage returns will typically be greater for silver over gold.

With the silver price having turned into resistance, there is a good chance we see a fresh bout of weakness to come for this precious metal. However, those thinking from a longer-term perspective will note the potential for outperformance once we reach a point where inflation declines enough to allow central banks to start planning to ease policy in a bid to combat economic weakness. The monthly chart highlights that longer-term perspective, with the July 2020 spike through $21.13 bringing an end to the post-2011 bear market. That signals a strong chance that the declines seen over the past two-years are a pullback before the bulls come back into play. Quite whether this is the bottom is debateable given the fact that the bull market generally takes hold after the recession as seen in the first chart. In any case, the long-term perspective does look positive despite the chance for further near-term weakness if the dollar continues to strengthen.