Silver Returns Pull Away From The Pack

Despite the dollar turning in one of the better global performances over the last year, precious metals did not have to miss out on the rally as evidenced by the stunning performance in silver. With political uncertainty back on the rise and members of the Trump Administration working to downplay dollar strength, silver is once again becoming a preferred risk-aversion destination. Although the correlation with the US dollar is not necessarily as strong as gold, continued pressure on the US currency is likely to fuel additional momentum higher.

While the US dollar might have significant room to appreciate over the medium-term thanks to a confluence of fiscal and monetary policy catalysts, the upside potential has shifted now that the Trump administration has broken from the traditional stance of past administrations. The renewed focus on increased trade competitiveness could send dollar bulls into a panic despite the more hawkish backdrop, helping silver solidify the most recent gains and reverse the prevailing downward trend.

Mixed Fundamentals and Shaky Political Environment Drive Investor Anxiety

Although silver prices are back on the retreat ahead of the upcoming conclusion of the two-day FOMC Meeting, it does not mean that gains notched over the last few weeks are set to reverse.  For one, the primary impetus for silver’s gains has been a confluence of factors, but predominantly political in nature. The strongest sign that times are changing is the Trump Administration’s departure from the principle of the stronger dollar narrative that was pushed by the Clinton Administration.  With both Trump and Treasury Secretary nominee Steven Mnuchin focusing on talking down the dollar combined with the latest salvos aimed at perceived currency manipulators.

In his latest blast, Trump chose to focus his attention on China and Japan, remarking that “other countries take advantage of America by devaluation.”  Although both countries were quick to hit back at Trump’s remarks, the damage was already done, with both the Yen and the Yuan climbing against the US dollar. In general, the point of these comments is to weaken the US dollar, which on a trade-weighted basis remains relatively overvalued compared to other major G7 currencies. However, the possibility of the government moving ahead with the infrastructure stimulus plan proposed by the Democrats could undermine these messages. Fiscal stimulus in general would be viewed as inflation positive, and therefore an upbeat development for the dollar vis-à-vis monetary policy.

Monetary policy is set to be tightened further over the medium-term, especially with inflation continuing to rise while economic activity remains stable.  Generally, while higher inflation is regarded as positive for inflationary hedges such as silver, it could also lead to rising interest rates which are a negative development for precious metals. However, while many future interest rate hikes have been priced-in for silver, the political uncertainty looms large over prices as evidenced by the latest climb. Nevertheless, for hints about how silver may perform, the dollar is an excellent place to watch and monitor over the near-term.

Dollar Softness Spurs Silver Surge

With the dollar under serious pressure amid the profit-taking and remarks from key government officials, the relationship between the US dollar index and silver prices remains significant. The correlation coefficient, which is indicative of how the Dollar index and silver move relative to one another, is currently showing a reading of -0.8320 implies a strong inverse relationship, meaning that as one goes up, the other is likely to go down. Therefore, any decline in the US dollar over the medium-term is likely to have the opposite effect on silver prices.

What Binary Options Traders Should Watch For

The most important upcoming event that could change the dynamic for silver prices is the upcoming FOMC decision due later in the session. Any hints at the future for monetary policy could very well create massive momentum in the dollar and therefore translate to gains or losses in silver. A more hawkish tone could sink recent silver gains whereas a more dovish statement may send prices surging higher from current levels.

Aside from the Federal Reserve, employment data could also move the needle on the dollar, with a figure that misses expectations encouraging additional increases in silver. However, the biggest elephant in the room remains the US government and Trump Administration and its determination to get the dollar to be more competitive. Further jawboning could provide the real stimulus behind any lasting gains in silver prices over the medium-term.