Silver Prices: What’s next on the horizon?

Silver prices have managed to track gold prices higher in 2024

The past year has been remarkable for both gold and silver prices, with silver delivering an impressive return of over 30%, making it one of the standout performers in the commodities space.

While robust central bank demand has been a significant driver for gold, it plays a less prominent role for silver. Nonetheless, silver's performance over the past year has been comparable to that of gold. Silver prices have surged by 31.2% year-on-year, closely mirroring gold's 31.7% increase.

Recent expectations of a more hawkish Federal Reserve (Fed) policy, coupled with a stronger US dollar and rising Treasury yields, have contributed to a pullback in silver prices from their decade-high levels reached in October. However, one may argue that this retracement has not disrupted silver's broader higher-lows formation just yet.

Has much already been priced around the hawkish Fed?

Recent positive US economic surprises have led market participants to recalibrate their rate cut expectations to lean towards only a single cut this year, which is less dovish than the previously guided median estimate of two cuts by US policymakers. Inflation risks are coming into focus, with economic data signalling for potential reflation, further underscored by anticipation of a Trump 2.0 administration.

While we may still expect Fed members to maintain their hawkish rhetoric, much around the Fed’s rate trajectory and potential Trump policies may have been largely priced for now, which leaves room for surprises. We have seen this on 6 January this week, when an unverified Washington Post report suggesting Trump might scale back tariffs triggered a more than 1% drop in the US dollar before it rebounded following his denial.

Ahead, any softer US economic data or a lack of follow-through in Trump’s policies could drive some unwinding in the US dollar or a pullback in US Treasury yields, which may offer potential tailwinds for non-yielding assets like silver.

Longer-term supply-demand prospects look supportive

The supply-demand dynamics for silver also suggest a supportive backdrop for prices. Data from Metals Focus highlights stagnating supply alongside steadily improving demand in recent years. While these trends may take time to exert a significant impact on prices, the evolving fundamentals are worth monitoring closely.

Silver positioning remains modest, leaving room for catch-up demand

Despite silver prices reaching a decade high in October last year, money manager positioning and silver exchange traded fund (ETF) holdings remain far from excessive, suggesting potential for catch-up buying with the right catalysts. The latest Commodity Futures Trading Commission (CFTC) data suggests that money managers’ positioning in silver contracts are still below their 10-year historical average, while holdings in the iShares Silver Trust ETF are still significantly below its 2022 high.

Technical analysis: Move above US$31.00 level needed for more buyers’ conviction

On the technical front, silver prices are trading within a near-term descending wedge formation, with the upper trendline resistance standing in the way at around the US$31.00 level. A breakout above this level could signal stronger buyers’ control, potentially opening the door for a retest of the US$32.55 mark, where the upper boundary of the Ichimoku Cloud resistance lies.

For now, sentiment appears to be gradually improving. Buyers are attempting to invalidate the head-and-shoulders breakdown observed on December 19, which is a positive sign, but maintaining support above the key psychological level of US$30.00 will be crucial for sustaining this upward momentum.