Silver forecast: metals liquidation drags XAG/USD into $50-55 support

Silver has slid into a long-term support zone between $50 and $55 after the liquidation in precious metals deepened on Friday, taking out its July low in the process. Gold's drop below $4,000 underlined the scale of the selling, as higher oil prices revived inflation worries and investors cut risk across the board. Until a clear reversal signal emerges, the near-term silver forecast remains tilted to the downside.

• Silver has broken its July low of $54.77 and dipped into long-term support between $50 and $55.
• Gold's break below $4,000 shows the selling in precious metals has yet to run its course.
• A hammer candle or a move above the bearish trend line would be needed before the outlook turns.

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Before discussing the macro backdrop and next week's central bank meetings, let's have a quick look at the chart first.

Technical silver forecast and key levels to watch

 

From a technical analysis point of view, the silver forecast now hangs on whether the long-term support zone between $50 and $55 can hold. The metal has already broken its July low of $54.77 and, in doing so, has dipped into an area of considerable technical importance. The $55 region marks the base of the rally that started at the back end of last year, while $50 is where silver topped out in 2011. This is the area where I anticipate silver could potentially bottom out, and the wick on today's candle shows the metal coming off its early lows at the time of writing. However, there is little point in pre-empting a bullish reversal while prices are still falling. What I would like to see first is a bullish-looking hammer candle in this zone or, failing that, a break in the market structure of lower lows and lower highs, such as a move above a short-term bearish trend line you can see on a daily chart (not included).

Until then, the path of least resistance remains to the downside. Whether the long-term support holds depends in large part on the broader mood across markets, where the selling in metals has shown little sign of abating.

Precious metals caught up in the liquidation

The sell-off in silver is part of a broader liquidation across precious metals. Gold briefly slipped below the psychologically important $4,000 level, which had served as the base of the summer rally, and the yellow metal is now threatening to take out its June low at $3,942.

The pressure has come against a backdrop of rising oil prices, renewed inflation concerns and growing doubts over the economics of AI investment. Thursday's session was particularly damaging for equities and metals alike. In other words, investors appear to have been reducing exposure across the board, and precious metals have not been spared.

Falling yields have yet to offer silver any relief

Lower bond yields would ordinarily lend some support to non-yielding assets such as silver. Ten-year Treasury yields have fallen back below 5% (before rebounding today) for the first time in a month, despite the renewed rise in oil prices, as the negative correlation between bonds and equities begins to reassert itself. Put another way, worries about risk appetite are starting to outweigh fears of a more aggressive Federal Reserve.

That relief has not yet reached precious metals. Nor has the dollar attracted its usual safe-haven demand, with the yen and Swiss franc instead the main beneficiaries of the defensive rotation. However, the bar for markets to price out a December Fed hike completely remains relatively high. That should limit the scope for a deeper correction in the greenback and, therefore, any support a weaker dollar might provide for silver.

Fed, ECB and BoJ decisions take centre stage next week

The Federal Reserve's decision on Wednesday, 28 October, at 18:00 GMT is the most important event for silver next week. The risk-off tone in stocks and the drop in yields suggest markets have priced out a rate hike at this meeting, so the focus turns to what Chair Kevin Warsh signals about December.

The European Central Bank follows on Thursday at 13:15 GMT, where surging oil prices argue for a hawkish hold despite the strains in France. The Bank of Japan is expected to keep its policy rate at 1.25% on Friday after last month's 25bp hike.

That leaves silver at the mercy of risk appetite heading into a busy week. A hawkish message from Warsh could keep pressure on precious metals, while any stabilisation in oil prices may give the metal room to build a base within its long-term support zone. Until a clear bullish reversal emerges, however, we maintain a cautious silver forecast.

Frequently Asked Questions

Why is silver falling?

Silver is caught up in a wider liquidation in precious metals, as higher oil prices revive inflation concerns and investors reduce risk across the board.

Where could silver bottom out?

The zone between $50 and $55 is where silver could potentially find a floor. It marks the base of the rally that began late last year and the level where silver topped out in 2011.

How could the Fed decision affect silver?

A hawkish signal on December from Chair Kevin Warsh could support the dollar and keep pressure on precious metals, while a softer message may ease it.

 

-- Written by Fawad Razaqzada, Market Analyst | Follow Fawad on Twitter @Trader_F_R