Silver Long-Term Charts Point To Potential For Explosive Breakout (Technical Analysis)

Precious metals, particularly silver, have caught my eye with their relative strength in this backdrop of stronger USD + higher bond yields + weak risk assets (equities, cryptos).

I wrote in August that the USD was likely to strengthen in the second half of 2023, and if so, that would probably be adverse for risk assets.

So far, that has been the case, with the Dollar Index rising from 102.50 back in August to 105.50 currently. This has coincided with increased volatility in equity markets, with the S&P 500 (SPY) and Nasdaq 100 (QQQ) falling between 6-7% from their highs in July.

Daily Chart: Dollar Index

Silver typically does not perform well in a higher yield environment, as the "asset" provides zero interest. Hence, its relative strength is eye-catching and noteworthy.

Looking at the long term chart of silver, it is holding up very well given the macro circumstances. XAGUSD broke out from a multi-year base in 2020, and has spent the last 3 years consolidating and building a second base. Prices are now tightening, and I believe we are likely to see a next leg higher very soon.

Monthly Chart: XAGUSD

Delving into the daily chart, we may observe that XAGUSD put in a bullish reversal candle on 21 September (Thursday). This was a day when the bond yields (US10Y) hit fresh highs, and both the SPY and QQQ fell between -1.6% to 1.8%.

Daily Chart: XAGUSD

It is not only against the USD that silver is building a multi-year base against, but also against a host of major currencies.

Against the EUR, we see that same base-building and tightening.

Monthly Chart: XAGEUR

Silver vs the GBP shows a very similar bullish technical picture.

Monthly Chart: XAGGBP

Same look against the AUD.

Monthly Chart: XAGAUD

Silver is almost at new highs against the JPY.

Monthly Chart: XAGJPY

All in all, we can appreciate how silver is performing in this difficult macro environment, where a strong USD and higher yields have historically been kryptonite for silver prices. Below, we can observe the correlations between the 3 markets dating back to 1998.

Comparison Chart: Silver (in purple), Dollar Index (in orange), US10Y Yield (in light blue)

I personally am long silver futures using my margin trading account. If you choose to do so, do note that there will be a negative carry to be long silver against a higher interest rate currency (pretty much every currency except JPY).

I do not mind, as I think there is huge long term potential for silver. If and when silver breaks out of its consolidative range, I think the breakout could be explosive given that amount of time spent building the base (3 years). The fact that silver prices have not sold off despite the negative carry also means that large buyers are stepping in.

For those who do not have a margin trading account, I would not recommend buying silver miners (SLVP) (SIL) as their technical charts look very weak. There seems to be a big divergence between silver spot prices and the prices of miners, perhaps due to the broad weakness in equity markets of late.

Weekly Chart: SLVP

Instead, the iShares Silver Trust (NYSEARCA:SLV) can be considered. The ETF aims to reflect the price of silver, and is liquid enough to trade, with the average daily volume coming in around 17 million shares, or more than $350 million in dollar traded volume a day, using the last price of $21.44.

As seen from the returns table below, SLV has tracked the reference benchmark (silver spot prices) pretty closely for the past decade.

Overall, I think something interesting is brewing in silver prices, which have held up very well in a difficult macro environment.

Are silver prices foreshadowing a decline in the USD and rates? Maybe, but it does not matter. My methodology is to follow price action, and the strength in silver prices stands out more given today's macro environment.

Silver prices theoretically should have collapsed already, but they are not. I think we see a breakout in silver prices soon, and coming out of a 3-year base, the breakout could be explosive.