Silver price forecast: undervalued and ripe for a bullish breakout
Silver price has wavered this week even as gold rose for four days straight and soared to an all-time high of $2,480. XAG was trading at $31.1 on Tuesday, a few points below the year-to-date high of $32.50.
China’s growth is slowing
Silver price has done well this year as it jumped by more than 42% from its lowest point in January and by 76% from its 2022 low.
Silver trailed gold this week because of a relatively negative economic data from China. In a report, the National Bureau of Statistics (NBS) said that the economy expanded by 0.7% in the second quarter, slowing from 1.5% in Q1. It expanded by 4.7% in Q2 after growing by 5.3% in the previous quarter.
Another report showed that the country’s industrial production slowed to 5.3% in May while retail sales slowed to 2.0%.
These numbers mean that the world’s second-biggest economy and the biggest silver consumer is not doing too well. In most cases, silver thrives when there is robust growth in the Chinese economy because it is an industrial metal.
China is not the only economy that is not doing well. Recent data showed that the United States has started slowing down in the past few months.
For example, data by the Institute of Supply Management (ISM) showed that the manufacturing and non-manufacturing PMIs dropped below the expansion zone of 50 in June, signaling that they are contracting.
Further, the unemployment rate rose to 4.1%, its highest point since 2021. US manufacturing and industrial production numbers have been weaker than expected in the past few months.
The same trend is happening in Europe, a continent that is going through rapid deindustrialization because of higher energy prices. Data released this week showed that the bloc’s industrial production dropped by 0.6% in May.
Federal Reserve rate cuts ahead
The next important catalyst for silver prices will be the Federal Reserve, which is set to start cutting interest rates later this year.
In a statement earlier this week, Jerome Powell, the Fed’s Chair, said that he may consider cutting interest rates even before inflation drops to the Fed’s target of 2.0%.
As a result, analysts expect that the Federal Reserve will start cutting rates as soon as in its September meeting. The closely watched CME tool places the odds of a rate cut in September at 100%.
Recent data showed that the headline Consumer Price Index (CPI), which looks at price changes in urban centers, dropped to 3.0% in June. Most importantly, the core CPI figure has dropped from almost 5% earlier this year to 3.2%.
The Federal Reserve is not the only central bank that is signaling to more rate cuts this year. In Europe, the Swiss National Bank (SNB) has already slashed interest rates two times while the European Central Bank has cut by 0.25%.
The Bank of Canada (BoC) has slashed interest rates while the Bank of England (BoE) is set to slash them in the upcoming meeting. Silver and other metals do well when global central banks are cutting interest rates.
Watch here: https://www.youtube.com/embed/jzSzCgrcEmU?feature=oembedSilver is undervalued
Meanwhile, additional data shows that silver has more positive fundamentals. Like other metals, the number of new mine discoveries has dropped in the past few years and its supply is not growing as fast as expected.
Recent data shows that silver production in 2023 stood at 26,000 metric tons, lower than the 26,500 produced in 2019.
At the same time, silver demand has continued rising in the past few years, helped by numerous tailwinds like electric vehicles and clean energy. Demand is expected to rise to over 1.2 billion ounces this year.
There are also signs that silver is undervalued. As I wrote recently, the gold/silver ratio has been in a downward trend in the past few weeks and currently stands at $80 from this year’s high of $92.12.
The gold/silver ratio looks at the amount of gold that an ounces of silver can gold. In this case, 1 ounce of gold is equivalent to 80 ounces of silver and is a sign that silver is quite cheap.
Silver price analysis
Turning to the weekly chart, we see that the price of silver has risen sharply in the past few months. It formed an inverse head and shoulders pattern and has now rallied above its neckline.
Silver also recently rose above the key resistance point at $30, its highest point in February 2021 and August 2020.
It has also remained above all moving averages, meaning that buyers are in control. Therefore, silver will likely continue soaring as buyers target the key resistance point at $35. This view will become valid if silver soars above the year-to-date high of $32.50.
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