Key Points:
- Fed likely to remain on course for further rate hikes in 2017.
- Industrial demand for silver remains buoyant.
- Silver likely to remain bullish in the short term but watch for Fed action.
Silver has continued to see concerted selling pressure as price action remains trapped within the confines of a sideways channel. Subsequently, the past few days has seen price action trending strongly towards the lower channel constraint where, historically, the metal has reversed. However, given the risk of near term action by the U.S. Federal Reserve, it remains to be seen if the metal will discover a bottom or continue to fall through the support structure.
In particular, the metal could potentially be facing a relatively large rout as the US economy continues to gear up for a range of monetary tightening. The risk of the Fed normalising rates was always ever present but as we move towards sustained economic growth and job gains it becomes relatively clear that the central bank will need to continue their cycle of tightening sooner, rather than later. Subsequently, the market is likely to focus upon the near term risk that a cycle of potential interest rate hikes pose.
Any such move by the Fed would potentially send Silver reeling from its current level and forward forecasting shows that 75bps of hikes to the FFR, over the next year, would see the metal trading around the $14.00 an ounce mark. However, that risk might yet to be reflected within the Silver futures curve which is still showing rising prices throughout most of 2017 and 2018. Subsequently, we could see a definite correction if the Fed actually follows through on their recent threats of further rate hikes in 2017.
Fortunately, the one fundamental factor which appears to be holding strong is the industrial demand for Silver. Physical demand continued to soar throughout most of 2016 which bodes well for the overall trend direction and may be what much of the futures curve is based on. However, this assumes that the silver market remains fair and there is plenty of evidence that this may not quite be the case with paper derivatives.
Ultimately, Silver is in for a rough few months ahead as the volatility is likely to be fairly severe when the Fed tightening cycle again commences. That rate hikes are coming is patently inevitable, especially given some of the recent gains in the job market, which suggests that it would pay dividends to position appropriately now before the rout commences in the medium term. However, for the short term at least, Silver is likely to reverse course and trend higher within its current channel.
