Will A Supply Deficit Power Silver Higher Post Central Bank Meetings?

Silver inched higher in European trading hours on Tuesday, extending yesterday’s gains after two consecutive weeks of closing in the red. Year to date, the grey metal has outperformed gold, oil and many other commodities thanks to a softening dollar, highly volatile markets and growing global demand.

There is only one day until the U.S Federal Reserve and the Bank of Japan announce their rate decisions and publish their economic assessments. While the Fed is widely expected to leave interest rates unchanged, the BOJ remains a mystery when it comes to which stimulus measure will be deployed. Possible options not only include cutting rates further into negative territory, but also buying more bonds and even maintaining current policies as is. All options will be taken into consideration at this week’s meeting. Whatever the outcomes may be, U.S and Japanese economies will continue to remain under accommodative monetary policies, echoing the general tone of policy easing all over the world.

Artificially low interest rates, disappointing economic indicators and political uncertainty (including the Brexit aftermath and upcoming U.S presidential elections in November) have caused investors to flock into safe haven assets such as silver and gold.

In general, silver prices often move in the same direction as gold prices but due to smaller market volume, silver tends to be the more volatile precious metal. Additionally, while gold is a purely monetary instrument and used for investing purposes mostly, silver demand is also derived from industrial applications.

“The World Silver Survey 2016,” an annual report published by The Silver Institute published in May said that the silver market in 2015 witnessed a physical deficit of roughly 130 million ounces, as demand increased by 39 million ounces to 1.17 billion ounces, outpacing 1.04 billion ounces of total supply. 2015 represents the third consecutive year of deficits and marks the second-largest deficit year since 2008.

High demand was driven by higher retail investment, jewelry and silverware fabrication and solar and demand for ethylene oxide catalyst. The report noted that demand for silver in solar panels grew by 23% on a yearly basis to 77.6 million ounces, demand by investors for bars and coins surged by more than 56 million ounces to 292.3 million ounces, while demand from the jewelry and silverware industries increased for the third consecutive year and hit a fresh record high of 226.5 million ounces.

According to a report published in August by Capital Gold Group, demand for silver used in solar panel manufacturing will “sky-rocket in the next five years” as industrial economies such as US, Japan, Germany and China try to bolster their green credentials by shifting from burning fossil fuels to using renewable energies to produce electricity.

Against the background that silver demand is increasing, the supply side seems subdued. Around three quarters of the world’s silver output is a by-product of mining for other metals. Therefore, cuts in capital expenditure and the closure of zinc, lead and copper mines over the last two years due to more stringent environmental policies in China and aging mines in Australia and production cutbacks by the biggest mining companies have effectively driven down the supply of silver.


Fig: SILVER D1 Technical Chart

Silver has been moving sideways for nearly two weeks between the resistance at the 23.8% retracement level at 19.365 and the support at 18.765. As a result, the ADX index has ticked lower below 20, suggesting cautiousness in the market that is keeping both sellers and buyers on the sidelines. The price action is trading very close to the MA’s and the MA’s themselves are tied very close together. Further the RSI is also crawling very close to the neutral level. All of this indicates a market that is range bound for the moment.The metal is expected to continue this current consolidation period until a breakout stemming from the fundamental side, coupled with cues from related markets such as gold and the US Dollar define a new direction.

Trade suggestion

Buy Stop at 19.200, Take profit at 19.370, Stop loss at 18.940

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