In 2022-2023, there has been much debate as to whether gold and silver act as hedging against inflation. However, elevated prices in 2024 have pushed XAGUSD quotes up 15% YTD. Let's discuss it and make a trading plan for XAGUSD.
Monthly fundamental forecast for silver
The de-escalation of the conflict in the Middle East was a real blow to XAGUSD bulls. Prices were heading towards the first of two previous targets of $30.6 and $32.2 an ounce. Still, Iran's inaction in response to Israeli strikes significantly reduced geopolitical risk and undermined safe-haven demand. As a result, silver experienced a pullback.
It never rains but it pours. One of the drivers of the precious metal rally was the improvement in the US manufacturing sector in March. However, in April, the purchasing managers' indexes for this sector of the economy disappointed, sending XAGUSD into a correction. Silver is widely used in manufacturing. Since the metal is sensitive to PMIs, a recovery in the manufacturing sector will help reverse the downtrend in ETF flows.
Silver price change and ETF holdings
Source: Bloomberg.
However, the weakening of the US dollar against the world's major currencies amid weak economic data, core durable goods orders, and GDP has allowed the XAGUSD bulls to grasp the situation.
Despite the rebound, the recovery of the bullish trend is doubtful. One of the factors behind the 15% rise since the beginning of the year and the almost 14% gain was the expectation of a rate cut at the Fed's sixth and seventh meetings. The market is in doubt about one or two cuts. Derivatives are pricing in a 1 in 5 chance that borrowing costs will remain at 5.5%. This poses a challenge for both risk assets and commodities.
At the same time, XAGUSD bulls are not about to give up. The era of high inflation of the 1910s, 1940s and 1970s seems to come back. Back then, precious metals outperformed other asset classes. This fact allows ANZ to forecast that gold will rise to $2,500 and silver to $31 per ounce. The firm believes that the ratio will stabilize at 80 by the end of this year after spiking to 91 in February.
Silver and gold price change
Source: Trading Economics.
Precious metals have regained their function as an inflation hedge that was supposed to be lost in 2022-2023. Over the past year, consumer prices have slowed while precious metals have rallied, allowing investors to doubt historical correlations. However, it is not a few months that matter, but years. If the global economy enters a prolonged period of high prices, XAGUSD buyers will likely reap the benefits of their purchases.
Monthly trading plan for silver
The medium-term outlook for silver remains bullish. In the short term, the return of investor interest in the US dollar as the Fed continues to hold the interest rate at 5.5% could lead to a consolidation in the $26-$29 an ounce range. In this context, consider buying silver on price dips and selling on rallies with a rebound from resistance at $27.7, $28.3, and $29.
Price chart of XAGUSD in real time mode
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