Image Source: Pixabay

Precious metals have had a great month so far. With risk appetite improving noticeably in the last week or so, silver, which is more of a risk-sensitive commodity, has outperformed the yellow metal. At the time of writing, gold was up 8% on the month while silver was up 13% and counting. Both metals have been supported by falling interest rate expectations, a weakening US dollar, some safe-haven demand, as well as strong physical demand from China.  All these factors are boosting the silver forecast.

Before discussing the fundamentals further, let’s have a quick look at the daily chart of silver.

Silver Technical Analysis

Source: StoneX and TradingView.com

Silver continues to print higher highs and higher lows on the smaller time frames ever since it bottomed out at $20.00 per ounce in early March. That low was actually higher than the previous ones it had formed in September and November. Thus, silver has formed a couple of higher lows on the higher time frames. I think it is likely to soon post a higher high above the peak of around $24.50 it had reached earlier this year. If that happens, silver will have also broken its long-term bearish trend line that has been in place since its last peak at $30.00 in February 2021.

The validity of this bullish technical view will become weak should silver turn lower on the session and move below key support around $23.50 now.  

Falling gold-silver ratio good news for grey metal

As mentioned, silver has outperformed gold. As a result, the gold-silver ratio has broken below its bearish trend line. This points to further outperformance for XAGUSD over XAUUSD. If the bullish trend remains intact for both metals, silver should shine more brightly, is what this chart is telling us.

Source: StoneX and TradingView.com

Weaker US dollar boosts silver forecast

On Thursday, the US dollar fell further against the likes of the euro and pound, although it did well against the yen due to continued unwinding of haven bets that had supported the yen last week when the banking turmoil had sent it surging higher. With gold and silver rising, I wouldn’t rule out a bearish reversal in the USD/JPY either. The EUR/USD climbed above 1.09 handle and GBP/USD was on the verge of taking out its earlier 2023 high around 1.2450. Correspondingly, the US Dollar Index (DXY) was struggling.

In recent weeks, due to the turmoil in banks and evidence of peak inflation, the market has been betting that we have reached a peak for interest rate hikes from the Fed and co. Investors are looking forward to looser monetary policy, perhaps from around Q4. The message from central banks deciding on monetary policy in March was all the same i.e., more rate increases may be required, not will be, if inflationary pressures persist.

Pent up Chinese industrial demand

We have important economic data coming up from both China and the US on Friday, which could pave the way for a sharp move in the dollar, and thus impact buck-denominated commodities like gold, silver and copper.

Copper and, to a lesser degree, silver, are often seen as proxies for Chinese economy. Whenever China’s economy is growing, industrial demand for base metals tends to rise. One of the ways to gauge the strength of the world’s second-largest economy is to look at its stock market. We have seen China’s stock market rebound while solid gains have also been observed in Hong Kong markets. Given the positive correlation between copper, silver and Chinese equities, this is an additional sign of strength for the silver outlook.

Will this positivity be mirrored in Chinese data? Well, we have the latest manufacturing and non- manufacturing PMIs due in the early hours of Friday. For silver and copper, it is the former which will be of greater importance. The manufacturing PMI jumped to 52.6 last month from 50.1 in January. This was the highest reading in for several years. Even before the pandemic hit, China’s manufacturing PMI was struggling to move away from the boom/bust level of 50.0. The fact we had such a strong number for February was due to pent up demand, as business conditions continued to pick up following the re-opening of the economy. For March, the PMI is expected to remain in the positive, but the ease back to 51.6. Any reading above this level could provide fresh impetus for metals and Chinese equities.

US inflation key risk event Friday

Once the Chinese manufacturing data is out of the way, the focus will then turn to US inflation, with Core PCE Price Index due for release at 13:30 GMT on Friday. This will arguably be the most important macro-pointer for the dollar, and dollar-denominated assets, in what has been a lighter week for scheduled data releases. Following the Fed’s policy decision last week, the market will be paying close attention to incoming inflation data in order to figure out whether more rate hikes will follow, or the Fed will hit the pause button. The Core PCE price index is the Fed’ preferred measure of inflation, so the market won’t take any surprise readings lightly. Generally speaking, the weaker the inflation reading, the positive the reaction for risk assets are likely to be.

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