Commodity deflation has left no stone unturned and precious metals have not come away unscathed. Although promising as a store of value, recent moves by the Federal Reserve have seen some uncertainty surrounding Central Bank decision-making abate. Confidence in a December rate hike is high following a blockbuster jobs report that saw nonfarm payrolls surge to the highest level since December of 2014. Although current Fed Funds futures are rising towards the 70% threshold for liftoff at the mid-December FOMC meeting, the pressure is on for precious metals. A weak consumer inflationary dynamic combined with far-reaching commodity deflation is seeing investors abandon haven assets in favor of yield.

The Fundamental Picture

Slowing global trade has made it more essential to benchmark potential outperformers and underperformers when it comes to rebalancing portfolios. Based on the latest indications following a slew of monetary policy decisions from Central Banks of advanced economies, the clearest divergence in years is occurring with the raised probability of a Federal Reserve rate hike. While the Bank of England has put off its expectations until the second half of 2016 at the very earliest for a rate hike, the European Central Bank is considering negative interest rates and Japanese policy is not about to move imminently. Commodity economies such as Australia, New Zealand, and Canada are keeping their accommodative tone, meaning the dollar looks set to strongly outperform competitors over the medium-term.

A stronger dollar reflects in part greater confidence in the value of fiat currency and furthermore conviction in the power of Central Banking. After many years at the zero bound, it has become increasingly difficult to have faith, but interest rate normalization on the part of the Federal Reserve is a strong first step towards restoring support. While silver is a great way to hedge against uncertainty and the devaluation of fiat currency vis-à-vis inflation, the conditions are not present. Consumer prices have found the way of producer prices to the downside with consumer inflation nearly at a standstill or decelerating quickly.

Uncertainty about the outlook for markets might still be high, but this is a difficult element to price. There are certainly bullion shortages as evidenced by the oversubscription and persistent unavailability of coins. However, even though physical demand may be robust, based on the amount of paper contracts outstanding versus actual physical product, silver prices could certainly hurtle lower if there is a paper unwind. Considering that the COMEX physical silver is lent out several multiples of 10 times, any sharp selloff is likely to impact silver bullion prices in spite of the large premium that exists for purchase of the physical.

The Technical Take

Looking at the most recent price action, silver in particular has taken a beating following the testimony by Federal Reserve Chair Janet Yellen and the payroll bonanza. The gradual resumption of the downtrend following a brief rebound in precious metals prices following the August rout has seen key support levels taken out and the emergence of a strong equidistant channel formation. The equidistant channel exhibits a strongly bearish bias with Put positions ideally initiated at the upper channel line targeting the lower channel line for exit. Call positions are not suggested at the lower channel line because reward potential narrows while risks can rise. However, should prices rise above the upper channel line, it could be indicative of a channel-based breakout to the upside that would be accompanied by renewed momentum higher, necessitating Call positions to benefit from a sustained rebound in prices.

Besides the equidistant channel pattern, a host of other indicators are lining up against prices over the medium-term in spite of the possibility of a near-term rebound in prices. The moving averages, in particular the 200-day and 50-day are still trending lower and remain well above current prices, adding to the existing bearish bias. However, apart from the risk of a potential upside breakout in silver prices, both the relative strength index and stochastic oscillator are increasingly pointing to a situation in which silver’s lengthy move lower might be slightly oversold and overextended to the downside. Silvers prices are currently sitting just on top of support at $14.370 and should this level or support at $13.989 hold fast, it could see a bounce to the upside over the near-term before retesting lows and breaking lower.

Conclusion

The confluence of fundamental and technical factors have largely lined up against silver prices over the medium-term. With inflation remaining unanchored and risks broadly biased to the downside along with the steady appreciation in the dollar, aside from uncertainty in global financial markets, there is no strong catalyst for upside at the moment. While prices might squeeze higher as shorts get overextended as evidenced by certain technical indicators, the bounce might be short-lived and an excellent place to initiate Put positions to take advantage of the longer-term trend lower in silver prices.

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