Silver price analysis in May 2020: will the price break out to new highs?
09:26, 26 May 2020
A rapid rally in May has lifted the silver price back to where it started the year, after it plummeted by 38 per cent in March when the Covid-19 pandemic hit industrial demand. While gold continues to lead precious metals higher in response to fiscal policies, silver has been riding a bullish wave with governments around the world starting to relax restrictions on industrial activity.
The market has rebounded by 53 per cent from the March lows and the current silver price trend is showing potential for further gains. That move has investors asking: What is the outlook for silver prices? Are silver prices expected to rise even higher?
This article recaps the metal’s recent performance and analysts’ view of the silver price in 2020. Scroll down for a video in which David Jones, chief market strategist at Capital.com, provides an update on the latest silver price news, using silver chart analysis to set up a trade to capitalise on the market’s momentum.
Silver price analysis in May 2020: precious metal rallies on rising investment demand
The silver price has been on a roller coaster so far in 2020, ranging between a $11.77 per ounce low and a five-month high of $18.96 per ounce. It climbed from $14.94 per ounce at the start of this month to hit $18.03 per ounce on May 20, with industrial consumption of the metal and investment demand rising simultaneously.
Silver is used in a range of industrial applications, from electronic semiconductors to batteries, solar panels, water purification and LED lighting, as well as jewellery. Expectations of a drop in physical demand for the metal began to exert downward pressure on the silver market in February as the Covid-19 pandemic spread, shutting production at factories around the world. Industrial consumption accounts for more than half of the annual demand for silver, compared with just 10 per cent in the gold market.
But the resumption of operations at some facilities in May has boosted sentiment, especially as the lockdowns to slow the spread of the virus have disrupted silver mining in South America, which accounts for the bulk of global production.
Silver mining companies in Mexico, the world’s largest producer, are scheduled to return to operations by June 1, having been shut down for two months. Production has also been suspended for much of April and May in Peru and Bolivia.
The silver supply/demand deficit is expected to widen this year as the fall in production outweighs the fall in industrial demand according to analysts at TD Securities. Supply is forecast to fall to 959 million ounces in 2020 from 1,003 million ounces in 2019, while demand is set to fall to 1,096 million ounces in 2020 from 1,127 million ounces last year.
On the investment front, while the March lows were prompted by a broad sell-off in the financial markets, investors have increasingly turned to precious metals given their traditional status as safe-haven assets. The silver market diverged from the gold price as the flight to safety initially focused on gold, which gained as much as 21 per cent from late March to mid-April and has since stabilised.
The gold:silver ratio – the amount of silver required to buy one ounce of gold – climbed to a record high of 125 in April, compared with an average of 60, as investors loaded up on gold in their portfolios rather than other precious metals. But the rise in demand for industrial metals has started to lift those markets along with gold. The record-high ratio indicated that silver was undervalued relative to gold and there was scope for the silver price to rise. The ratio has fallen to around 100, remaining well above the long-term average.
Bearish economic statistics, including purchasing managers’ index (PMI) figures, consumer price index numbers and unemployment claims, are boosting precious metals prices.
Preliminary composite PMI figures for May showed industrial and commercial activity, while rising, remains in contraction. The IHS Markit flash composite US PMI was 36.4 for May, from 27 in April, with a number below 50 indicating a contraction. The figure for the Eurozone was 30.5, from 13.6 in April, while in Japan it was 27.4 in May from 25.8 in April.
Further action by the US Federal Reserve, which has cut interest rates and provided unprecedented liquidity to the financial markets, could push down the US dollar and, in turn, lift precious metals prices further. Federal Reserve chairman Jerome Powell has indicated in his public comments earlier this month that the central bank will continue to provide financial stimulus until the US economy recovers.
“With a balance sheet given a green light to grow much further and lots of options on the forward-guidance front, this should continue to be supportive of gold and silver prices,” said analysts at BMO Capital Markets.
Watch Capital.com’s chief market strategist, David Jones, explain the drivers for silver in May 2020 and give you suggested trading levels to profit from the silver chart volatility.
What is your sentiment on EA?
The rally has further room to run: will silver prices continue to rise?
Silver technical analysis shows that the next resistance level above $17.60 per ounce is the February high at $18.95 per ounce, while there is support at $15 per ounce and the $13 per ounce level. The RSI is extremely overbought indicating the market has become overstretched, but short-term weakness in the price could present a buying opportunity.
“While deteriorating industrial demand has provided a strong headwind against silver prices (leading silver's performance to lag gold's… it may now become a tailwind,” according to analysts at TD Securities. “Silver has increasingly been driven by commodity demand. At the same time, however, we note that silver ETF holdings have been highly correlated to gold's of late – suggesting investment demand for the precious metals theme is also flowing to silver.”
The TD analysts anticipate the silver price rise has further to run. “Inasmuch as commodity demand continues to firm, the context of rising investment flows in precious metals, combined with rising commodity demand, creates the set-up for explosive performance – particularly considering the constrained supply-side and low speculative interest.” Net speculative length in silver ETF holdings remains relatively low, leaving scope for additional buying as sentiment shifts, with some flows potentially rotating from gold to silver.
The $17.50 level is a key pivot point, analysts at MKS Pamp point out, with near-term targets putting the silver price up at $18.84 per ounce.
But analysts at Capital Economics argued last week that “the outlook for silver prices is relatively poor” for the remainder of 2020. “Our research suggests that the silver price is becoming more correlated with gold than industrial metals. However, its closer relationship with gold does not mean it is a comparable safe haven.”
In their most recent silver analysis, the analysts said: “Going forward, we expect the silver price to underperform gold through to end-2020. As the global economy slowly revives in the second half of the year, we suspect that any (marginal) silver price gains accrued from industrial demand will be more than offset by falling safe-haven investment, pulling silver prices lower by year-end.”