After the manufacturing sector had ceased supporting the XAGUSD bulls, they gave up on it. Now, silver has different growth drivers. What will determine the XAGUSD trend? Let us discuss the Forex outlook and make up a trading plan.
Weekly silver fundamental forecast
Silver has had the best daily rally since February 1st amid a downturn in the ISM US manufacturing sector index from 64.7 to 60.7. As the industrial demand makes up a substantial share in aggregate silver demand, silver was outperforming gold in 2020 amid a rapid rebound of the industry compared to the services sector. However, a decline in the manufacturing PMI resulted in the XAGUSD growth! Is it a paradox? In no way! Like any other trading asset, the silver price is determined by many factors. The XAGUSD is quite responsive to financial markets.
In May, investors again like the idea of commodities super-cycle. Iron ore has hit a record high; copper is growing in value, the demand for oil and other assets is also increasing. The commodity prices are booming amid massive monetary stimulus and the global demand recovery. Economic expansion is expected in the world’s leading economies for the remainder of the year. The euro area, the UK, and other countries are likely to join China and the United States, which pushes up commodity prices and increases the risk of inflation acceleration. Furthermore, the Fed’s passive attitude, which is willing to put up with the overheating of the US economy, results in the Treasury real yields, supporting the growth of gold and other precious metals.
In this regard, a slowdown in the US manufacturing PMI is seen as a signal that the US economy hasn’t fully recovered, and the Fed should continue to pour cheap liquidity into the financial system, supporting the XAGUSD appreciation. Furthermore, the greenback outlook seems to be bear amid the massive monetary expansion, so I can say that the further silver trend is clear. I wonder if the silver price will break through its all-time high of $50 per ounce reached ten years ago. In my opinion, the chance is rather low.
Although the Silver Institute expects metal demand in 2021 to rise to its highest level since 2015, ETF capital inflows will slow from 331.1 Moz to 150 Moz, bringing the deficit from 251 Moz to 126 .7 Moz.
Silver supply and demand
Source: Silver Institute
However, it must be understood that the market is constantly changing. Nobody knows when the market will change, but it will. Although the Fed is repeating its mantra about a temporary surge in inflation and its willingness to put up with the economy overheating, it will have to unwind monetary stimulus at some point. According to research by BofA Merrill Lynch, the world’s leading central banks should reduce the monetary stimulus volume from $9 trillion to $3.4 trillion in 2021. It will drop to $0.4 trillion in 2022. When large buyers leave the market, the price of bonds falls, and their yield rises. The bond yield rally is the primary bearish factor for both gold and silver.
Weekly XAGUSD trading plan
Unless the US strong jobs report triggers Treasury yields growth, one could buy silver with the target at $28.4 and $30.1 per ounce. Otherwise, the bond yields rally could strengthen the dollar and press down the silver price to at least the support at $26.1.
Price chart of XAGUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.