June 1st, 2024, Silver bulls need to come back quickly

Silver bulls need to come back quickly

While gold prices have been consolidating since mid-April and failing to generate sustained upward momentum, the silver bulls have taken control of the silver market. The surge above USD 25 at the end of March provided the long-awaited breakthrough the downtrend line, which the silver bulls quickly capitalized on to break through the major resistance zone around USD 30, too. As a result, silver reached a new 12-year high at USD 32.50. Despite the pullback on Friday afternoon, the silver rally remains intact, with prices expected to reach around USD 35 in the coming weeks.

In recent weeks, silver prices staged an impressive surge, notably breaking through the long-standing resistance level around USD 30. However, even with prices above USD 30, silver is still trading significantly below its inflation-adjusted hypothetical peaks of around USD 70 in 2011 and approximately USD 152 in 1980, suggesting that it remains relatively undervalued.

Buyers in Shanghai continue to pay high premiums for gold and silver

Silver Premiums. Difference Silver Spot in percent USA & China, as of May 28th, 2024. Source: Pretiorates

In fact, silver is one of the few commodities still trading significantly below its historical highs from 1980. While many other commodities, such as oil, copper, or iron ore, have surpassed their record prices from 1980 in recent years, the silver price has stubbornly remained below its all-time high of around USD 50 per ounce from January 1980.

Even the peak of about USD 50 in April 2011 could not sustainably exceed this record value. In contrast, the prices for gold, platinum, and palladium have developed far beyond their 1980s highs in recent decades. Thus, in the grand scheme, silver still appears to have considerable catch-up and upward potential.

Physical demand from China is dictating silver prices

Fundamentally, the rising industrial demand, particularly from the photovoltaic industry, combined with the physical demand from China and India, is exerting immense pressure on the limited supply. Consequently, gold and silver prices are now being dictated by the Chinese market, as Chinese investors in Shanghai are still paying a premium of nearly 2% for physical gold.

Physical silver is even traded there with a premium of over 12.5%. This means that the manipulation on the COMEX and the Western commodity exchanges through uncovered paper silver has come to an end. As long as these high premiums persist in China, the upward trend in silver is likely to continue.

Silver in US-Dollar – Daily Chart

Silver in US-Dollar, daily chart as of June 1st, 2024. Source: Midas Touch Consulting

Looking back, the current upward cycle in the silver market began on October 3rd, 2023, with a low point at USD 20.67. Since then, silver has surged by more than 57% from trough to peak! However, this impressive rise was not a one-way street; there was a prolonged and arduous sideways consolidation, particularly from early December to late February. Since February 28th, silver prices have soared sharply, clearly taking the lead within the precious metals sector.

The rise above USD 25 in early April also led to a clear breakout from the large consolidation triangle in which the silver price had been trapped for the past three and a half years. Buoyed by this breakout, silver prices quickly continued their ascent to USD 29.79. However, the resistance zone around USD 30, combined with a pullback in the gold market from mid-April, initially caused a rebound, bringing prices back to around USD 26 for a few days in early May.

Silver breaking through USD 30

Strengthened by this breather, the silver bulls immediately returned to the market. Purposefully and effortlessly, they broke through the major resistance zone around USD 30, causing silver prices to quickly rise to USD 32.50, the highest level since December 2012.

It was only last week that a new pullback occurred, which, with a low of USD 30.04, successfully tested the breakout level. During the trading week ending yesterday, silver bulls slightly missed last week’s high, reaching only USD 32.30. This lower high together with the high at USD 32.50 could be classified as a double top. However, we assume that it is simply another pullback making the zone between USD 30 and USD 32.50 a sideways running battleground.

Above approximately USD 29.30, the dynamic breakout and upward movement in the silver market remain intact. From the triangle formation, we had identified an initial price target of around USD 35, which we believe could still be reached in the coming weeks. The upper Bollinger Band on the daily chart already allows for prices around USD 33.25.

Beyond that, the next resistance zone lies between approximately USD 34 and USD 37.50. This price region was last traded between March 2011 and December 2012. Although a direct surge to around USD 50 cannot be completely ruled out given the huge catch-up potential of silver, it is not very likely due to the strong resistances on the way up. We rather suspect that the rally will initially find its conclusion at around USD 35ish. Afterwards, silver should start correcting and pulling back.

Potential head-and-shoulder topping pattern in the gold market

Alternatively, silver has indeed already topped out at USD 32.50. This would mean that the expected larger pullback in the sector as started. However, given that gold is already pretty oversold, we think that if gold can hold the USD 2,280 to 2,300 support in the next few days, it might try one more time to attack the psychological resistance around USD 2,400. There, we expect a failure which would create a head-and-should topping pattern in the gold market. Of course, this would be step 3. First we expect a bottom in gold around USD 2,280 to 2,300, then a rally towards USD 2,400. For silver, an approx. USD 100 rally in gold could bring the final surge towards USD 35. Afterwards, the metals should start their correction, which may lead gold prices down towards the breakout level around approx. USD 2,110!

Silver in Euro – Daily Chart

Silver in Euro, daily chart as of June 1st, 2024. Source: Midas Touch Consulting

Calculated in Euro and based on the last low point of EUR 20.15 on January 22nd, silver has surged by 48.5% within just four months. Most recently, on May 20th, silver reached EUR 29.92, the highest level since December 2012.

Silver in Euro since 1979, as of May 31st, 2024. Source: Gold.de

Interestingly, the all-time highs of around EUR 34.15 and EUR 34.50 are not that far off, as both in 2011 and 1980, the euro and the Deutsche Mark were much stronger against the US dollar than today.

It would not be surprising if the silver prices in the coming weeks were to challenge the area around EUR 33 to EUR 34.50 for the first time since 2011. However, given the nearly eight-month rally and the overbought conditions, we believe that the silver bulls will initially fail here, and a longer consolidation phase will become necessary thereafter.

Conclusion: Silver bulls need to come back quickly

Since the end of April, silver has clearly taken the lead in the precious metals sector. In contrast, gold has struggled to develop upward momentum and only managed to inch to a slightly higher new all-time high of USD 2,450 on Whit Monday.

The silver bulls, however, continue to appear agile and hungry. Technically, a rise to around USD 35 is achievable, and slightly higher targets up to around USD 37 are also conceivable. Silver pulled back on Friday, forming a textbook double top chart pattern that suggests a potential decline. However, we focus with Argus eyes on the range USD 29 to USD 29.35 for a potential bottom in the short-term.

Strong silver prices usually herald the end of a rally in the sector

Nevertheless, it should be remembered that precious metal rallies always end with a final surge in the silver market. This means that the strong silver price likely marks the final chapter of the rally that began in October. Consequently, after the upcoming intermediate high, precious metal prices will probably need to consolidate and correct for several weeks, if not months.

In the bigger picture, however, the silver price is not only likely to revisit its all-time high of around USD 50 in the coming years but should also advance towards triple-digit prices.