SILVER Analysis

SILVER Analysis

Afternoon: Silver Under Pressure Amid Dollar Strength, Fed Outlook, and Middle Eastern Tensions

Highlights:

• Strong U.S. labor market curbs expectations of aggressive Fed rate cuts, limiting gold’s upside.
• Middle Eastern tensions support gold’s safe-haven appeal, preventing a steeper decline.
• Upcoming Fed meeting minutes and CPI data will play a crucial role in gold’s near-term

Overview:

Silver prices have been under significant pressure, trading around $31.80 per ounce as the U.S. dollar remains strong and investors digest the latest economic and geopolitical developments. The dollar index hovers near 102.4, its highest level since mid-August, largely due to stronger-than-expected U.S. economic data, a cautious Federal Reserve outlook, and ongoing safe-haven flows fueled by rising tensions in the Middle East.

Key Factors Affecting Silver Prices

1. Stronger-than-Expected U.S. Employment Data: The September nonfarm payrolls report showed a stronger-than-expected increase in jobs, which has significantly influenced investor expectations regarding the Federal Reserve's future interest rate decisions. Nonfarm payrolls rose by 254,000 in September, surpassing market expectations of around 140,000. This robust job growth reduced concerns of a slowing U.S. economy, leading to a reassessment of the pace at which the Fed might cut interest rates in the upcoming months.
2. Federal Reserve Rate Cut Expectations: With the stronger employment data, investors have dialed back their expectations for aggressive rate cuts by the Federal Reserve. According to the CME’s FedWatch Tool, the probability of a 50-basis-point rate cut in November has been priced out, and markets now see an 86% chance of a smaller, 25-basis-point rate cut. While some Federal Reserve officials, such as Alberto Musalem, President of the St. Louis Fed, still support additional rate cuts, Musalem emphasized the need for caution, suggesting that the central bank should avoid over-easing policy as the economy continues to grow.

Lower interest rates typically benefit precious metals like silver, as they reduce the opportunity cost of holding non-yielding assets. However, the reduction in the expected pace of rate cuts has limited the upside for silver, contributing to its recent decline.

1. Rising U.S. Treasury Yields: Another factor pressuring silver is the rise in U.S. Treasury yields. Benchmark 10-year U.S. bond yields recently exceeded 4% for the first time since early August. Higher yields make bonds more attractive relative to non-yielding assets like silver, prompting some investors to shift their focus away from precious metals.
2. Middle Eastern Tensions and Safe-Haven Demand: The escalating conflict in the Middle East, particularly involving Israel and Iran, has heightened geopolitical risks, driving demand for the U.S. dollar as a safe-haven asset. In contrast, this has placed additional downward pressure on silver, as the stronger dollar makes dollar-denominated commodities like silver more expensive for foreign buyers, reducing demand.The conflict, which has seen Iran launch missile attacks on Israel, has raised concerns about potential disruptions to the region's oil supply. U.S. President Joe Biden has refrained from directly condemning Israel's potential strikes on Iran's oil facilities, leaving the possibility of further escalations open. These geopolitical concerns have further supported the dollar, adding to silver's recent struggles.
3. Chinese Demand and Industrial Use: Despite the pressure from the U.S. dollar and bond yields, silver continues to be supported by industrial demand, particularly from China. Silver plays a critical role in various industrial applications, including electrification and solar panel production, both of which are key components of China's fiscal and monetary stimulus efforts. China has implemented measures aimed at boosting its slowing economy, which is expected to increase demand for silver in the coming months. However, for now, these measures have not been enough to offset the broader pressure on the metal.

Technical Analysis: Silver Support and Resistance Levels

From a technical perspective, silver prices are finding support at key levels:

• Support Levels:
  • Silver prices have established firm support around $30.75 per ounce.
  • On the MCX (Multi Commodity Exchange), support is observed around ₹91,200.
• Resistance Levels:
  • Immediate resistance is noted at $31.80 per ounce.
  • On the MCX, resistance stands at ₹93,600.

These support and resistance levels define the current trading range for silver, and a breakout above resistance could trigger further buying, while a breakdown below support could lead to additional selling pressure.

Trading Strategy: Sell on Jump Near Resistance

Given the current macroeconomic environment and technical outlook, a cautious trading strategy is recommended. Silver remains under pressure, and traders may consider a sell-on-rise approach.

Action:

• Consider selling silver if prices rise to around $31.25 per ounce.
• Target price: $30.88 per ounce.
• Stop loss: Implement a stop loss just above the resistance level at $31.80 per ounce.

This strategy allows traders to capitalize on potential downward movements in silver prices while minimizing risk in case of an unexpected rally.

Key Economic Data to Watch

Several key economic releases in the coming days could have an impact on silver prices:

1. German Industrial Production m/m: This data will provide insight into the health of the German economy, the largest in the Euro Zone.
2. French Trade Balance: An important indicator of economic strength, this release could influence market sentiment toward the Euro Zone.
3. U.S. Trade Balance: As one of the key drivers of global economic activity, U.S. trade data will be closely watched by the market, with implications for the dollar and, by extension, silver prices.
4. FOMC Member Bostic Speaks: Any comments from Federal Open Market Committee (FOMC) members, including Raphael Bostic, could provide further clues on the Federal Reserve’s monetary policy direction, affecting silver.

Conclusion: Silver Faces Downward Pressure but Long-Term Outlook Remains Positive

Silver remains under pressure from a strong U.S. dollar, rising U.S. Treasury yields, and revised expectations for Fed rate cuts. However, demand for silver in industrial applications, combined with ongoing geopolitical tensions, offers some support. The market's focus in the coming days will be on key economic data releases and any further developments in the Middle East, which could drive volatility in silver prices. For now, traders are advised to adopt a cautious approach, with an eye on technical levels for guidance.

Support and Resistance Levels: