Silver moving away from record highs: critical floor at $64.00

Despite panic taking over financial markets, the usual safe-haven metals are getting ignored. The US Dollar, on the other hand, became the shining star of the board, recovering its refuge status after long missing it. What happened?

Risk aversion surged after the United States and Israel unleashed military attacks on Iran last Saturday, killing its Supreme Leader, the Ayatollah Ali Khamenei. Tehran answered in full force, striking back and hitting US bases in different Gulf countries, including the United Arab Emirates, Qatar, Kuwait, and Saudi Arabia. But it was not only on US bases, but Iran's attacks on neighbouring countries had also targeted US diplomatic missions and civilian sites.

The war in the Persian Gulf entered its fifth day and has become a global disruptive event, with consequences extending above and beyond the region. Traffic through the Strait of Hormuz has been interrupted, with Iranian forces claiming complete control. Also, air travel across the Middle East remains severely disrupted.

Just the tip of the iceberg

In response to the war, Oil prices soared amid fears of energy supply disruptions, while the USD surged amid demand for safety. Why is it then that Gold and Silver remain depressed?

One word: inflation. Price pressures are likely to become a major concern, not only because of soaring Oil prices but also because of energy shortages, which will further push prices higher.  

Most central banks ended or are about to complete their loosening cycle, although the Reserve Bank of Australia has already reacted to stubborn inflation by delivering a rate hike. Who will follow? Given the latest data, there are increased odds that the European Central Bank, the Bank of England, and the US Federal Reserve will be the next in line.

If the Fed changes course and starts hiking rates, the US Dollar will regain its crown. And that’s exactly what market participants are pricing in right now. Indeed, is not something happening in the next couple of meetings, but who knows?  

Investors’ fears and the US Dollar rally can cool down should the war end quickly, including the destruction of Iran's nuclear power. But such a scenario does not look possible in the next few weeks. Still, if something like that happens in the near term, the US Dollar should go back to weakening on uncertainty, while precious metals should resume their run to record highs. Now? Now does not look likely.

What’s up with Silver?

Not everything is lost for Silver, as technical readings on the daily chart show the downward potential is still limited. Technical indicators regained upward traction around their midlines, retaining modest upward slopes. At the same time, the XAG/USD pair is trading above all its moving averages, albeit currently struggling to stay above a mildly bullish 20 Simple Moving Average at around $83.00, drawing the first line of buyers.

However, the same chart shows that the pair faltered in its latest recovery ahead of the 50% Fibonacci retracement of the $121.66-$64.08 slump. Furthermore, Silver is currently capped by the 38.2% Fibonacci retracement of the same rally at $86.08.

What would it take for Silver to recover its shine? The pair would need to at least close a daily candle above the 68.2% Fibonacci retracement at $99.60. A recovery beyond $100 should open the door for a rally towards record highs and beyond. On the other hand, the pair bottomed on Tuesday at around $78.00, with a break below the level exposing the base of the range, and the ultimate barrier for buyers, at $64.00.