Earlier today, silver was up 3.5% but along with gold. But the metal has since fallen sharply to turn flat on the day, potentially signalling a bearish technical reversal. We have seen other markets also come under pressure after a brighter start earlier this morning. Chief among them were cryptocurrencies, where the carnage continues. Ether has broken below $3,000 while Bitcoin has fallen below $90,000. Testing multi-month lows, ETH is now 40% and BTC 30% off their October records. Will precious metals track cryptos and major indices lower? Our silver outlook has turned cautiously bearish owing to the risk selling in recent days.
The recent risk-off tone across financial markets seems to have resumed following the earlier calm, with traders aware of Nvidia’s results after the bell. But the real culprit seems like concerns over Japanese debt is really unnerving investors. The resulting rally in bond yields and the strengthening US dollar are also adding pressure to the silver outlook.
Analysis: why could silver break lower?
We have seen a sharp rise in bond yields of certain countries in recent days, most notably Japan, and now the UK. Fiscal worries are pushing yields higher as investors demand higher reward for holding onto government debt. With bond yields on the rise, this is not something positive for low- and zero-yielding assets like gold and silver. But it is not just rising yields that matter, it is the unwinding of leveraged bets as the yen and cryptocurrencies continue to tumble.
In Japan, the debt problem is fast turning into a currency crisis. The yen has continued to plunge. Markets fear the government is mismanaging the economy and are therefore demanding a higher yield for holding Japanese debt. What has this got to do with silver? Well, silver is above all a risk asset. We have seen other risk assets plunge in recent days. The moves in Japanese assets have potentially ignited a so-called carry trade unwind. The carry trade is where you borrow money from a country with interest rates low, and you use the funds to buy stocks and other financial assets like gold, silver and crypto in other currencies like the dollar. With Japanese yields now surging, the cost of the carry is increasing. Yields are starting to get uncomfortably high, and this is increasing the pressure on leveraged bets, causing traders to unwind their trades in all sorts of financial assets, including gold and silver.
Dollar storming higher undermines silver outlook
Also applying pressure to precious metals is the rallying dollar, thanks to the slide in yen and pound, among other currencies. Looking ahead, we’ve got FOMC minutes coming up, followed by delayed September nonfarm payrolls coming in on Thursday, which is very important. Meanwhile global PMIs are due on Friday.
So, the dollar is subject to heightened volatility as we move into latter half of this week. With markets stuck in a risk-off environment so far this week, that’s helping the dollar push higher. Recent hawkish comments from Fed officials have also helped push expectations for a December rate cut down to about 11 basis points—implying a roughly 50% probability of a cut.
Silver technical outlook: bearish reversal?
Silver’s plunge to a session low after being sharply higher earlier is hardly positive. Similar price action has been observed on the price of gold chart. But the metal was still clinging on. Key support in the 49.75-50.00 area and then the trend line at 48.85ish need to be monitored now. A potential break below those areas could lead to further technical selling in the days ahead.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
