Silver price has been on a downward trend since reaching a three-month high of $28.75 per ounce on May 2. The white metal has lost more than 16% of its value in less than two weeks, dropping to its lowest level since April 3 on Tuesday. As of this writing, silver is trading at $23.96 per ounce, down 0.80% for the day.
What’s driving the silver price lower?
There are several factors that have contributed to the sharp decline in silver price in recent days. Some of them are:
– A stronger US dollar: The US dollar index, which measures the greenback’s strength against a basket of six major currencies, has risen by more than 2% since May 2, reaching a four-month high of 93.43 on Tuesday. A stronger dollar makes silver and other dollar-denominated commodities more expensive for foreign buyers, reducing their demand.
– Rising US Treasury yields: The yield on the benchmark 10-year US Treasury note, which reflects the market’s expectations of future inflation and interest rates, has increased by more than 10 basis points since May 2, reaching a one-month high of 1.70% on Tuesday. Higher yields make bonds more attractive as an alternative investment to silver and other non-yielding assets.
– Tapering expectations: The minutes of the latest Federal Reserve meeting, released on May 19, showed that some policymakers had started to discuss the possibility of scaling back the central bank’s massive bond-buying program in the coming months, if the economic recovery continues to gain momentum. This raised the market’s expectations of a sooner-than-expected tightening of monetary policy, which could weigh on silver and other precious metals that benefit from low interest rates and ample liquidity.
– Technical factors: Silver price has broken below several key support levels in its recent downtrend, triggering more selling pressure from technical traders and momentum-driven investors. The metal has breached the 50-day, 100-day and 200-day moving averages, as well as the 38.2% Fibonacci retracement level of the March-May rise at $23.92 per ounce. The next major support level is seen at the 50% Fibonacci retracement level at $22.86 per ounce.
What’s the outlook for silver price?
Despite the recent slump, some analysts and investors remain bullish on silver price in the medium to long term, citing the following reasons:
– Robust industrial demand: Silver is widely used in various industrial sectors, such as electronics, solar panels, batteries and medical equipment. As the global economy recovers from the pandemic-induced slowdown, the demand for these products is expected to increase, boosting the demand for silver as an industrial metal.
– Inflation hedge: Silver is also seen as a hedge against inflation, which erodes the purchasing power of fiat currencies and lowers the real returns of bonds. With many central banks and governments around the world implementing unprecedented stimulus measures to support their economies amid the Covid-19 crisis, some investors fear that inflation could rise faster than expected in the coming months and years, increasing the appeal of silver and other hard assets.
– Undervaluation: Silver is also considered to be undervalued relative to gold, based on the historical ratio between the two metals.