Silver: precious metals to strengthen further?

Precious metals are continuing to recover nicely from their bear trend that had started from July of last year. Gold has hit its highest level since the end of November, while silver has reached its best level since the middle of December, though metals were trading narrowly mixed at the time of this writing. The slightly weaker dollar and expectations of rising global inflation have been the biggest drivers behind gold and silver. Gold, as well as a perceived safe haven metal is also considered to be a good hedge against inflation.

Though the dollar has bounced back today, I think there is potential for it to weaken again as currently there are no fresh catalysts to drive it higher – granted Donald Trump is speaking later, which may cause some volatility in the FX and equity markets, and by extension gold and silver. Despite my short-term bearish view, the dollar remains well supported in the long-term as the Fed continues to be the only major hawkish central bank out there.

Thus, in the short-term, we could see gold and especially silver make further progress. Why "especially" silver? Well, the daily chart of Gold-Silver ratio looks like it is starting to turn lower again, meaning that gold will be underperforming silver going forward. It is worth pointing out the obvious here which is that both metals could also fall in unison; the chart merely highlights the relative performance of one against the other regardless of the direction of the two precious metals.

Now in terms of silver itself, the grey metal continues to rise inside its bearish channel. So, for the time being, one has to be wary of the fact that silver is technically still in a bear trend. However, it is very encouraging to note the key long-term support area around the $16 handle has held as support (see shaded area on the chart). Silver now needs to break its trend of lower lows and lower highs in order to confirm a change in direction. This makes the area around $17.20 (the last swing high) very important – if silver breaks through this level then we could see an eventual bullish break outside of the bear channel, potentially leading to some significant gains.

Conversely, if short-term supports such as $16.70 and $16.25 break then a revisit of $16 would become highly likely, and perhaps this time the support may give way for a move towards the 2015 lows. This is not our base case scenario, however.