Could silver rally despite dollar rebound and stocks at new highs?

The markets started off fairly quietly this morning and it look like it was going to be another snoozer of a session, much like Monday when volatility was absolutely minimal. Many market participants were sitting on their hands, trying to figure out what the dollar was up to after its NFP-inspired rally at the end of last week. In the afternoon we had some US macro data, namely JOLTS Job Openings and IBD/TIPP Economic Optimism. Normally the markets hardly respond to these figures. However, as the sentiment on the dollar had been so negative, any piece of good news would have been a good enough excuse for speculators to buy the dollar at these depressed levels. And so it proved, as the greenback surged higher on the back of news US jobs openings rose to a record high level. They climbed by a solid 8% to 6.2 million, the highest on records dating back to 2000 according to the Labor Department. This is a leading indicator of employment and so it points to solid hiring in the months ahead. The Economic Optimism index rose to 52.2, above 50.6 expected, from 50.2 previously. So, all the Fed needs to see now is a rise in inflation, which should give the go ahead for further rate rises.

Given the rebound in US dollar and the rallying US stock indices to fresh record highs, it is reasonable to expect precious metals to fall in the coming days. After all, why would investors buy something that is priced in the dollar (which is now rising), doesn’t pay any interest or dividends, and costs money to store? BUT here is what is making me think outside of the box: if the fundamentals appear so bearish for the metals, why aren’t they falling? Admittedly, precious metals did weaken post the US jobs data, but they did not exactly fall off a cliff. So, either they are about to take a plunge, or something big is about to happen – such as a US stock market crash, in which case demand for perceived safe haven metals could soar. It is when the markets don’t respond to news in the way you would expect them to, when big things happen.

So, with that in mind, I am half expecting a big upsurge in precious metals because of the lack of response to what would otherwise have been bearish macro environment for the metals. Out of the two metals, I would rather look for bullish setups on silver than gold, for the former is also widely used in industrial processes. Put another way, silver has dual usages which makes it more attractive than gold. Other industrial metals have been rising sharply in recent times, including iron ore and copper. Today saw aluminium prices trade above $2,000 a tonne for first time in nearly three years. As well as reduced concerns about excessive supply, demand appears to be on the rise again for industrial metals from China.

Taking everything into account, silver may be about to stage a meaningful rally as it potentially joins other base metals in finding significant support. A weaker US inflation report on Friday could help accelerate the potential rally. If silver has any chance of going higher, it will need to clear resistance around $16.45/50 area first then break market structure of lower lows and lower highs next. The last high was around $16.80-16.95 area. Therefore If and when we move above here, then the path for a much bigger rally may potentially clear. After all, that monthly candlestick pattern on silver (hammer) looks beautiful. For now though we proceed with extra care and watch short-term support levels closely. At this stage, it is only a potential bullish scenario, until we move above last month’s high.