Best of the Week
Most Popular
1.The Trump Reset, US Empire's Coming Economic, Cyber and Military War With China (2/2) - Nadeem_Walayat
2.Now Is the Time to Buy Gold - 5th Jan 17 - John Grandits
3.CIA Planning Rogue President Donald Trump Assassination? Elites "Manchurian Candidate" Plan B - Nadeem_Walayat
4.The Trump Reset - Regime Change, Russia the Over Hyped Fake News SuperPower (Part1) - Nadeem_Walayat
5.Most Popular Financial Markets Analysis of 2016 - Stock Market Crash Postponed Again - Nadeem_Walayat
6.No UK House Prices Brexit Crash 2016 Despite London Weakness, Forecast 2017 - Nadeem_Walayat
7.President Trump Understands the NSA, CIA... LIE, America's Intelligence Agencies Crime Syndicate! -Nadeem_Walayat
8.President Donald Trump's 2017 New Year Message, BBC Fake News, Was 2016 a Dream? - Nadeem_Walayat
9.Major Stocks Bear Market Still Looms - Zeal_LLC
10.Biased 2017 Forecasts - Debt, Housing and Stock Market (1/2) - James_Quinn
Last 7 days
The Story of the U.S. Regime Change Plan in the Philippines - 16th Jan 17
Gold Price 2017 Trending Towards $1375 as Forecast - 16th Jan 17
'Deep State' CIA Director States We are Not NAZI's, Warns Trump Does Not Understand Russian Threat - 15th Jan 17
UK House Prices Forecast 2017 - Crash or Bull Market? - Video - 15th Jan 17
SPX Stocks Bull Market Update - 14th Jan 17
President Trump vs the Deep State that Hides in Plain Sight - 14th Jan 17
The Impact of Sir Alex Ferguson's Retirement on Man United's Share Price - 14th Jan 17
What Can Stock Market Tell You About Politics? - 13th Jan 17
Big Gold Buying Coming 2017 - 13th Jan 17
A Bullish Case for Gold 2017 - 13th Jan 17
Will Stocks Bull Market Continue to Charge or is it Time to Sell the News - 13th Jan 17
Gold and Silver Off To Shining Start to 2017 - 13th Jan 17
Gold’s Fundamental Outlook for 2017 - 13th Jan 17
Is trading stocks and shares just as luck-based as roulette? - 13th Jan 17
Trump CIA Like Nazi Germany - Fake MI6 Intelligence leaked to Fake News Mainstream Media - 13th Jan 17
USD in Decline. SPX and TNX May Follow - 12th Jan 17
CIA War On Trump - Leaks Fake MI6 Intelligence to Fake News Broadcast Media - 12th Jan 17
Registered Address.co.uk London Business Registered Office Address Mail Forwarding Review - 11th Jan 17
13 Contrarian Economic Predictions For 2017 - 11th Jan 17
10 Potential Black Swans and Opportunities for the US Economy in 2017 - 11th Jan 17
How to Get a Bird of Paradise Plant to Flower - UK Growing Video - 11th Jan 17
The No.1 Energy Stock To Buy Right Now - 10th Jan 17
Frank Holmes: Gold Rally Extremely Likely in January and February - 9th Jan 17
Test Your Markets Trading Knowledge: Find the Clear Wave Pattern on this Chart - 9th Jan 17
Markets 2016 Past is 2017 Prologue - 9th Jan 17
Stock Market Major Indexes Reached New Record Highs - But Will They Continue Higher? - 9th Jan 17
Agri-Stocks and Agri-Food Prices: Both Strong - 9th Jan 17
The Two Hottest Commodities For Investors In 2017 - 9th Jan 17
Gold Price US$700? OR US$7000? - 9th Jan 17
Stock Market Tad More Distribution Needed - 9th Jan 17

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

What Can Stock Market Tell You About Politics?

Silver Price Breaks Higher on Rising Anxiety

Commodities / Gold and Silver 2016 Jan 31, 2016 - 03:52 PM GMT

By: AnyOption

Commodities Echoing the perilous financial market volatility of late, silver prices have gradually moved to the highest levels since December as growing risk aversion and shifting sentiment see safety bids gain momentum.  While not necessarily indicative of a resumption of the trend higher that began in the depths of the last financial crisis, several factors are pointing to increased potential gains in the precious metal as investors are forced to pivot from yield to quality in an effort to hedge against ongoing turmoil.  While inflation may remain low, dragging on prices over the medium-term, tightness in the physical supply chain alongside increased interest in hedging against uncertainty of monetary policy and central banking continue to contribute to upside in silver.


Surging Volatility Stokes Safety Bid

The worsening fundamentals inherent in the Chinese economy combined with an ongoing deterioration in global trade has sent investors fleeing back to the safety of precious metals as the early phases of the storm look to be upon financial markets.  In general, financial market instability and greater political uncertainty contribute to a risk premium in silver prices.  While difficult to quantify the actual numerical impact of risk aversion, it is understandable that during periods of greater intervention, silver typically responds positively as investors demand wealth preservation to offset the possibility of widespread depreciation in financial instruments.  However, silver prices do not necessarily always go up in times of turmoil as evidenced by the last financial crisis when prices fell.

Volatility in financial markets is not forecast to abate in the near-term as Chinese policymakers work tirelessly to prevent sustained capital outflows and keep markets stable by increasingly injecting liquidity to keep rates from spiking.  However, as returns for equities and other asset classes become more volatile and the Yuan is devalued further, the incentive for owning and holding physical precious metals has increased dramatically, stoking buying pressure on the physical side as citizens look to preserve their wealth.  Outside of China, demand for precious metals is equally on the rise as evidenced by soaring premiums and regular shortages at mints.  With uncertainty on the rise, the bid in precious metals continues to reflect sentiment and the desire to store value.

Physical and Paper Dislocation

Amid rising bids for silver futures, it is important to recall a relevant phenomenon from the past year; premiums to purchase physical silver are surging.  Depending on the source of data, some buyers are currently experiencing premiums of anywhere between 20-30% and in some cases as high as 81.38% for physical coins versus paper contracts, underlining issues in the supply chain for silver.  Key producing nations saw output fall during 2015, with US production shrinking by -6.50%, followed by a -4.60% decline in Chile and a contraction in excess of -20.00% in Canada.  While part of this may be attributable to the cash cost of extraction falling below breakeven costs, it could also be indicate increased difficulty in pulling the precious metal from the ground and diminished unmined supply. 

2015 was filled with declarations of supply shortages at mints globally, with both Canadian and US mints experiencing dramatic levels of oversubscription compared to actual inventories of coins.  Weaker production led to substantial delays in deliveries and the surging premiums that were noted above.  If problems continue to arise in the supply chain during 2016, it could add to the upward pressure in silver prices over the medium-term, especially if physical demand remains as robust as it was in 2015.  However, despite the upward pressure, there are risks that are more challenging to quantify, such as weak inflation and the trajectory of monetary policy.  As deflation encircles global economies, it could substantially diminish the appeal of precious metals unless it is met head on with greater central bank accommodation.

Monetary Policy and Inflation

Decisions yesterday from the US Federal Reserve and the Reserve Bank of New Zealand highlight the ongoing challenges for policymakers as they attempt to ward off deflation.  US efforts to raise rates have come at a time of rising volatility and energy prices dragging inflation downward.  New Zealand meanwhile is already jawboning the potential for additional rates cuts as they work to restore weak headline inflation at 0.10% to the target range.  Should the recently hawkish Federal Reserve turn dovish and other global central banks accommodate policy further by printing more fiat currency, the stage could be set for a sustained move higher in precious metals. Furthermore, if confidence in central banking plummets, it could see increased demand for haven assets such as precious metals.

While deflation would typically be viewed as negative for precious metals which are intended as a hedge against inflation, the result will be increased monetary policy accommodation in the form of quantitative easing, asset purchases and interest rate reductions.  On the whole, these are net positives for precious metals that could drive prices substantially higher over the medium-term.  With inflation unlikely to rebound of the near-term amid slowing trade, weak demand for raw commodities, and plunging prices, deflation is already at the doorstep of most advanced economies and something that policymakers will have to address in coming central bank meetings.

Technically Speaking

From a technical point of view, silver prices climbed towards a major technical level this week before retreating back to the downside amid another round of gains in the US dollar.  The precious metal has an inverse correlation with the US dollar, and similar to gold is sensitive to price momentums in the currency as evidenced by the chart above.  Nevertheless, since climbing back from prices last seen in 2009 in the lead up to the bull-run, silver prices have found support in the 50-day moving average.  Despite the fact that the longer-term 200-day moving average remains on the upside trending lower acting as resistance, it does mean that prices have further room to rise in the near-term if they can climb above important resistance at 14.530.  Should risk-aversion and volatility remain a real factor, prices could rise as high as 15.000 over the coming weeks. 

While the stage is set for further gains in silver prices, financial markets do not always behave according to underlying fundamentals.  Pressure will remain heavy on silver prices over the near-term if the US dollar continues to ascend.  However, if central banks are forced to accommodate monetary policy further to deal with rising volatility, deflation, and problematic liquidity conditions, the stage is already set from a physical standpoint for a rally higher in silver prices.  Technically speaking, the outlook is mixed, but that does not mean lack of upside opportunity in the near-term if the 50-day moving average continues to act as support over the medium-term.  With all the factors taken into consideration, silver is at a pivotal point with any new developments likely to have a strong influence on the future of price momentum.

Anyoption™ is the world's leading binary options trading platform. Founded in 2008, anyoption was the first financial trading platform that made it possible for anyone to invest and profit from the global stock market through trading binary options.

Our goal here at Market Oracle is to provide readers with valued insights and opinions on market events and the stories that surround them.

Website anyoption.com

© 2016 Copyright  Anyoption - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife