silver price prediction

Silver Price Prediction for January 2021

The below silver price forecast article is based on one of the Gold & Silver Trading Alerts that we sent to our paid subscribers. Enjoy:

Gold was likely to top at its triangle-vertex-based reversal and based on today’s (Jan. 8) pre-market slide it’s crystal clear that its exactly what happened.

Silver price flashed the same signal a few days earlier - it was the early bird of turnaround indications. And since the entire precious metals: gold, silver, and mining stocks tend to move together, it was only a matter of time when both reversal points trigger a sell-off.

So, while you're likely reading this because you're interested in the outlook for the silver prices, please note that this outlook is very much related to the outlooks for gold and for mining stocks. Therefore, the following part of the analysis, will focus on the entire trio. I will also comment on the related markets: USD Index and bonds. But first, a quick digression about the usefulness of the technical analysis in the current market environment.

History doesn’t have to repeat itself, right? Of course, it doesn’t have to, but it tends to happen very often to a considerable degree.

Things are so much different right now than they were last year, two years ago, in 2011, in 2008, in 1980 and in all the other years, and yet the same technical principles continue to work. Every now and then – when the history actually doesn’t repeat itself and some technical techniques don’t work – I read e-mails and comments about technical analysis not working anymore, or that things changed and that past price patterns cannot be used to make forecasts for the future anymore. What you see today and in the last couple of days clearly proves that technical analysis works and can be very useful. This time, knowing about the triangle-vertex-based reversal technique helped us not to buy (both: literally and figuratively) into the story about gold’s major breakout above its declining resistance line.

Yes, gold did break above it, but it was likely to reverse anyway, which meant that the breakout was likely to be invalidated. Without knowing about the reversal, one might have viewed the breakout as a game-changer, which it wasn’t. Instead, the breakout was invalidated in today’s pre-market trading.

Gold just failed yet another attempt to break above the 2011 highs.

Why do technical (chart-based) techniques work and why will they continue to work years from now, pretty much regardless of how the world situation will look like with regard to the political, economic and financial environment? Because nothing will make fear and greed disappear. These emotions make people want to buy high and sell low, which causes trends, and sometimes price bubbles, to form. The technical techniques are just ways to analyze how exactly the above tend to form.

Having said that, let’s take a look at what gold just did:

Figure 1 - COMEX Gold Futures

Gold declined and invalidated the breakout above the declining resistance line based on the August and November tops. It also broke below the rising short-term support line. The breakdown below the short-term support line should be confirmed before becoming bearish, but the invalidation of the breakout is already bearish.

Please note that silver was the first metal that indicated the reversal – it had its triangle-vertex-based reversal a few days too early, but overall, the indications were very useful.

Wouldn’t it be nice if silver had another clear triangle-vertex-based reversal in the relatively near future, in order to guide us? It does!

Figure 2 - COMEX Silver Futures

The silver price has its next triangle-vertex-based reversal in the second half of February, around Feb. 23. That’s when we might see the next reversal in the precious metals market. Based on today’s decline and the USD’s rally, it seems that the above-mentioned reversal will be a bottom (but it’s too early to say for sure).

And speaking of the USD Index…

Figure 3 - USD Index

In yesterday’s analysis, I wrote the following:

The above tells us that if the USD Index rallies more visibly here and breaks above the declining resistance line in a decisive manner, gold would be likely to truly plunge.

And that’s exactly what’s likely to happen! The USD Index is extremely oversold and just a little strength here will allow it to break above the steep resistance line.

I further added:

Figure - USD Index (ICE), USD, GOLD, GDX, and SPX Comparison

With the situation looking just like it did in early 2018, it seems that the USD index is bottoming, and the precious metals sector is topping.

The USD Index is slightly below the Fibonacci-extension-based target based on the size of the most recent corrective upswing and the declining dashed resistance line. The same situation in 2018 (also please note that cryptocurrencies are in a price bubble now just like they were in early 2018) meant that the final bottom was already in. The situation in the RSI indicator is similar as well.

As you can see, the USD Index has indeed rallied above the declining resistance line (regardless of whether we consider the line based on the intraday highs or the one based on the closing prices). Also, given today’s move above 90, the USDX is back above the declining dashed line from the above chart. Back in 2018 this comeback meant that the final bottom in the USD Index was in and the top in the PMs and miners was also in.

Figure 5 - VanEck Vectors Gold Miners ETF (GDX) and Slow Stochastic Oscillator (Slow STO) Comparison

Mining stocks didn’t do much yesterday (Jan. 7), but neither did gold – it is in today’s pre-market trading that the sizable decline is taking place.

The spike in volume in the GDX ETF that we saw recently continues to emphasize the similarity between the recent top, the November top, and the late-July top. The implications remain bearish. It seems that miners will soon decline in a more visible way. In fact, the GDX is already 2% lower in today’s trading on the London Stock Exchange.

Yield Moves Matter

On Dec. 28, I warned that a spike in nominal and real yields could eventually derail the gold rally. And yesterday, after the U.S. 10-Year nominal yield hit its highest level in more than 10 months, I wrote:

Not far behind, the U.S. 10-Year real yield rose by 1 basis point (0.01%) on Jan. 5 (FRED data is delayed by one day, so after yesterday’s spike in nominal yields, the 10-year real yield is likely even higher).

For context, the U.S. 10-Year real yield bottomed at – 1.08% on Aug. 6, Aug. 31 and Jan. 4. However, after awakening from its slumber on Jan. 5, another rally in real yields will reduce gold’s relative attractiveness.

And 24 hours later?

Well, the situation is evolving rapidly.

Please see the chart below:

Figure 6 - 10-Year Breakeven Inflation Rate

Yesterday, the U.S. 10-Year breakeven inflation rate (which is the interest rate needed to avoid a negative real return) hit 2.09%. But as inflation expectations continue their ascension, they’re not keeping pace with nominal yields.

Please see below:

Figure 7 - 10-Year U.S. Treasury Yield

Yesterday, the U.S. 10-Year nominal yield traded at an intraday high of 1.085%. If we do a little math (and subtract the breakeven inflation rate from the nominal yield), it means that the real yield jumped to an intraday high of – 1.005%.

Moreover, considering the real yield was – 1.08% only four days ago, the current move is extremely significant. And if real yields continue their breakout, gold will likely face some near-term pressure. For context, the last time the real yield rose above – 1.00% (hitting – 0.98% on Dec. 14), gold futures ended the day at $1,832.10.

In addition, the recent breakout continues to steepen the yield curve. Yesterday the 2yr/10yr spread (which subtracts the two-year interest rate from the 10-year interest rate) hit its highest level (0.93%) since 2017.

Please see below:

Figure 8 – U.S. 2-10 Year Yield Curve

As always, there are a multitude of factors affecting gold prices and real yields are just one piece of the puzzle.

However, many aspects are also intertwined.

Yesterday’s U.S. dollar strength coincided with the rise in nominal (and real) yields. This occurs because higher interest rates make U.S. government (and corporate) bonds more attractive to foreign investors. Thus, foreign investors are more likely to sell their currency, buy U.S. dollars and use the proceeds to invest in U.S. Treasuries (at the now higher interest rates). As a result, the reallocation propels the U.S. dollar higher and provides a double-barreled blow to gold.

EUR/USD Stuck in Neverland

After flashing green for nine of the previous 11 trading days, yesterday, the EUR/USD finally faced reality.

The EUR/USD accounts for nearly 58% of the movement in the USD Index. Thus, the USDX’s rise (and gold’s subsequent fall) depends on the movement of the currency pair.

On Dec. 28, I wrote:

The Eurozone economy is in free-fall.

Remember, currencies trade on a relative basis. Thus, a less-bad U.S. economy is good news for the U.S. dollar.

Please see below:

Figure 9 - Alternative Indicators for 2020 from Germany, France, Italy and Spain

Across Europe’s largest economies – Germany, France, Italy and Spain – economic activity is rolling over (To explain the chart, alternative economic indicators are high-frequency data like credit card spending, indoor dining traffic, travel activity and location information.)

And underpinning the irrationality, the deceleration is happening as the euro is strengthening.

Make sense?

Fast forward to Jan. 7.

Eurozone retail sales plunged by 6.1% in November, hitting their lowest level since April. Furthermore, economists expected a decline of only 3.4% (the red box).

Figure 10 - Eurozone Retail Sales (Source: Bloomberg / Daniel Lacalle)

In addition, Europe’s Consumer Price Index (CPI) – which measures Eurozone inflation – fell by 0.30% in December (landing nowhere near the ECB’s target of a 2% increase).

Please see below:

Figure 11 - European Central Bank (ECB) Balance Sheet

If you follow the two visuals, you can see that the ECB’s printing press isn’t solving the problem. As a double-negative for the euro, the ECB’s balance sheet (the white line) continues its vertical ascension, while Eurozone CPI (the yellow bars at the bottom right) remain in negative territory.

Notice how the two went in opposite directions in 2020?

More importantly, weak CPI is a precursor to a weaker euro. Why so? Because since asset purchases fail to produce any real economic growth, the ECB will be forced to lower interest rates to stimulate the economy. As a result, the cocktail of paltry economic activity and lower bond yields leads to capital outflows as foreign (and domestic) investors reallocate money to other geographies (like the U.S.). Thus, capital will likely exit the Eurozone and lead to a lower EUR/USD.

For comparability, U.S. CPI rose by roughly 0.20% in November and has been positive since June (However, December’s data isn’t released until Jan. 13.)

Figure 12 - Consumer Price Index for All U.S. Urban Consumers

The bottom line?

Yesterday’s USD awakening could be a sign of things to come. Despite investors closing their eyes to the economic dichotomy, each fundamental hammer chips away at the euro, and in time, should propel the USD Index higher.

Summary

Summing up, the outlook for silver, gold and the rest of the precious metals market is bearish for at least the next few weeks. After topping at their triangle-vertex-based reversals, silver and gold moved sharply lower, breaking below their rising support lines. All this happened as the USD Index rallied visibly above its declining resistance lines and invalidated the breakdown below the 2020 lows. This creates a strongly bearish combination for the precious metals market.

Thank you for reading our free analysis today. Please note that the following is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the downside target for silver, gold, and mining stocks that could be reached in the next few weeks.

If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free - sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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