Silver: Fed statement could be precious for metals

The Federal Reserve will be in focus at 19:00 BST (14:00 ET) when it will most likely decide to leave interest rates unchanged. The US dollar and other financial markets could nevertheless move sharply depending on the language the FOMC uses in the policy statement to describe the health of the world’s largest economy, inflation outlook and the likely path of future interest rate changes. This will have indirect impact on some commodities which are priced in the US dollar, such as gold and silver. Gold has been in consolidation for a good two months now. But other precious metals such as silver and platinum have broken out to new multi-month highs. One obvious explanation for the decoupling of the precious metals is the fact that silver, unlike gold, also has many industrial uses. So, at times when risk sentiment is positive, it tends to perform better along with copper and oil prices. Added to this, economic data from China has actually improved a little of late. This has helped to boost the grey metal’s appeal from an industrial demand point of view. Gold has meanwhile been held back by its status as the ultimate safe haven asset as US stock markets continue to climb towards their record highs despite weaker corporate earnings and concerns about economic growth in the US.

Therefore, as things stand, silver looks set to continue outperforming gold, especially if the Fed’s policy statement sees the dollar’s current downward trend accelerate in the event of a dovish outcome. But with both metals being non-interest-bearing assets, a hawkish surprise may limit the potential gains for silver and weigh heavily on the underperforming gold. So, there could be decent opportunities for both the bulls and bears involved in the precious metals markets this evening. As always, it is the reaction of price to news that is more important than the news itself. In this regard, it will be really interesting to see if the metals will be able to decouple themselves from the greenback i.e. go in the same direction.

From a technical point of view, silver’s recent breakout above the key $16.15 to $16.35 resistance range still remains the dominant force acting on price. The moving averages, as shown on the chart, are all pointing higher now and this bullish momentum is reflected on the RSI momentum indicator nearing 80. Though this may point to severely “overbought” market conditions, it is important to note that sometimes the RSI can remain at these elevated levels for long periods of time. On this occasion, the fact that silver was in a consolidation for an extended period of time before it broke higher meant that the RSI would reach these extreme levels in no time anyway. Thus, it shouldn’t necessarily be seen as a bearish scenario. A bullish scenario for those that follow the RSI indicator closely would be if silver were to consolidate in tight ranges now. This would allow the RSI to unwind through time rather than price action.

But as mentioned, the underlying price action on silver remains bullish and further gains look the more likely outcome, rather than consolidation or a sell-off. In recent days, silver actually formed several indecisive-looking doji candles, which looked especially bearish because the RSI has been holding in the “overbought” levels. Yet, there has been no follow-through in the selling pressure. When price fails to do what you would normally expect it to do, in this case go down, then it strongly suggests that it wants to go higher.

A decisive break above the prior high of $17.70 is what the bulls want to see now. If realised, a rally towards the next potential resistance levels, such as those shown in red on the chart, or the Fibonacci extension levels could get underway. However, in the event of a sell-off, a break below support at $16.75 would probably pave the way for a revisit of the broken resistance range at $16.15-$16.35, which could then turn into support. A potential closing break below this range however would be deemed a rather bearish outcome.