Bullish Signs for Silver in Challenging Market Conditions

• Silver holding up despite a strong US dollar and higher bond yields
• Trade tensions may support silver's resilience
• Bullish signals from RSI and MACD favour bullish bias

Summary

Silver hung tough on Friday despite a stronger US dollar and higher US bond yields—an environment that historically would have challenged the precious metal. Nor did it buckle despite near-term technical headwinds generated by an obvious topping pattern. Given how well the price held up overall, it hints the path of least resistance may be higher in the near term.

Silver Bucks Strengthening Headwinds

Friday’s trading session was characterised by US dollar strength and higher US Treasury yields, sparked by a further escalation in tensions between the United States and major trade partners, along with a hawkish US jobs report. Unemployment fell unexpectedly while average hourly earnings surged, casting further doubt over the prospect of further rate cuts from the Federal Reserve this year. Normally, that would create headwinds for the silver price. 

Source: TradingView

As seen in the chart above tracking its relationship with nominal and real US interest rates and the US dollar over the past month, silver has exhibited a particularly tight inverse relationship with US 10-year real Treasury yields, showing a correlation coefficient of -0.79. The inverse relationship is not quite as strong with nominal 10-year Treasury yields, while that with the US dollar index is weak.

Historically, higher real yields—reflecting what Treasuries are returning over and above market expectations for inflation over a specific period—have been a major headwind for precious metals prices—but not on Friday.

 Mexico, China Major Silver Producers

Instead, escalating trade tensions may have been an offsetting factor, with Donald Trump flagging that reciprocal tariffs on trade partners were likely this week—a threat he reconfirmed on Sunday.

While there was nothing specific related to silver, it does pose the risk of sparkling retaliation from other nations. Crucially, the largest producers of silver—a critical industrial metal used in electronics and medical goods—are Mexico and China, two nations in the crosshairs of Trump.

Given the risk posed to supply, it’s perhaps not surprising the silver price is hanging tough given the threat of an escalating trade conflict.

Silver: Bullish Bias Favoured

Source: TradingView

Currently hovering just above the intersection of minor horizontal and uptrend support, with momentum indicators such as RSI (14) and MACD continuing to generate bullish signals, a potential long setup is emerging in silver.

Bulls could consider establishing longs above $31.75, with a tight stop beneath this level or the minor uptrend established on January 27. Potential targets include the February 7 high of $32.65 and $33.10. A break and close beneath the intersection of horizontal and uptrend support would scupper the bullish bias.

Although the evening star pattern completed last week signalled downside risks, they failed to materialise on Friday despite tricky market, reinforcing the merits of retaining a bullish bias. 

-- Written by David Scutt

Follow David on Twitter @scutty