It has become increasingly difficult to gauge the severity of weakness in silver prices, following last week’s slump.
The metal was one of the worst hit due to the ongoing trade war between the US and China.
Silver prices experienced a significant drop, falling 7% on Friday to reach a 7-month low of $28.3 per ounce on Monday.
At the time of writing, the metal was up 2% at $30.207 an ounce on COMEX, recovering somewhat from the recent sell-off in the market.
“Since last Wednesday, the drop in silver has totalled a good 16%, meaning that the silver price has fallen almost as much as oil prices,” Carsten Fritsch, commodity analyst at Commerzbank AG, said.
Gold/silver ratio surpasses 100
The gold/silver ratio, which represents the amount of silver required to purchase one ounce of gold, experienced a significant increase, surpassing the 100 mark.
This notable event marked the first time the ratio had reached such heights since mid-2020.
The previous instance of the ratio exceeding 100 coincided with the onset of the coronavirus pandemic.
During this period, the price of silver faced substantial downward pressure, primarily due to the global economic uncertainty and market volatility caused by the pandemic.
Unlike gold, silver is also an industrial metal, which is one of the reasons for the sharp decline since last week.
“The upside for the white metal might be limited due to investors liquidating positions to secure profits, possibly covering losses or margin calls on falling asset valuations, fueled by concerns about a global trade war,” Lallalit Srijandorn, editor at FXstreet, said in a report.
Nonetheless, the weaker Greenback might help limit the USD-denominated commodity price’s losses.
Not a safe-haven metal?
The widening of the gold/silver ratio has indicated that silver may not be a safe metal in times of “sharply rising risk aversion or increasing fears of recession, but behaves like a cyclical commodity,” Fritsch said.
The reason for this is the great importance of industrial demand, which has risen significantly in recent years and now accounts for almost 60% of total silver demand.
“Industrial demand is therefore both a blessing and a curse for silver,” he added.
The increasing demand for applications that support the generation and utilisation of climate-neutral energy, such as photovoltaics and e-mobility, is a double-edged sword.
On one hand, it presents a significant opportunity for growth and development, driven by the global shift towards sustainable energy sources.
On the other hand, this sector’s close ties to the overall economy make it highly susceptible to fluctuations in market sentiment and economic downturns.
In times of economic uncertainty and heightened risk aversion, as is currently the case, investments in renewable energy projects may decline. This is likely to drag silver prices down.
Fritsch said:
It is therefore impossible at the moment to estimate how long the weakness in silver prices will continue.
Silver price outlook
The daily chart shows that bearish sentiment in the silver market is likely to persist as the price remains capped below the key 100-day Exponential Moving Average (EMA), according to FXstreet’s Srijandorn.
The 14-day Relative Strength Index (RSI) is currently around 32.70, which is below the midline.
This further supports the current downward momentum and indicates that sellers are likely to remain in control for the near future.
The XAG/USD’s initial downside target is located at the $30.00 psychological level, Srijandorn said.
Source: FXstreet
Should that level be breached, the next support levels are at $28.80 (the low of December 20, 2024) and $28.31 (the low of April 7), she added.
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