Silver trading strategy: Here's how to trade Silver on Dec 12; key levels

Silver: Fresh record highs

Performance

The stunning silver rally continues unabated as the grey metal keeps on surging to fresh record highs on a confluence of bullish factors including ETF inflows, excessively accommodative monetary policies, the Federal Reserve supporting reckless government spending, falling US Dollar and geopolitical tensions.

  On December 11, the grey metal continuing its stratospheric rise surged to a fresh record high of $64.34.   

  At the time of writing this article, Spot silver was trading at $64.20, up around 4 per cent for the day, while the MCX March silver contract was trading with a gain of 5.50 per cent at Rs 199,100.  

FOMC decision

As widely expected, the US Federal Reserve cut the Fed Fund rate by 25 bps to 3.5 per cent-3.75 per cent on December 10, in a 9-3 vote. FOMC, signalling a brief pause said. that it will consider the extent and timing of additional adjustments. The Fed said to address money market tightness, it will start buying $40 billion of treasury bills/month from December 12, as a reserve management strategy. Its T bill buying plan coupled with the Fed Chair Powell’s presser in which he expressed grave concerns over the job market have been construed as dovish by investors. In fact, although T bill buying is technically not a QE, it is liquidity-friendly and an unabashed support to unbridled government borrowing, a clear sign of fiscal dominant monetary policy.

Consequently, the US Dollar Index is slumping while commodities, bonds and risk assets are rallying hard.

US Dollar Index and yields

The US Dollar posted its worst day since September following the Fed's decision to cut rates. Closing around 0.45 per cent lower at 98.78 on Wednesday, it extended its decline on Thursday. At the time of writing, the Index was hovering around 98.25, down nearly 0.55 per cent for the day.

  Ten-year US yields fell nearly 0.75 per cent to 4.14 per cent on December 10 and eased further by 2 bps on December 11, while 2-year yields, which had earlier slumped over 2 per cent to 3.54 per cent on dovish Fed, were down by 2 bps to 3.52 per cent.

India’s pension regulator allows pension funds to invest in gold and silver

S Ramann, chairman of the regulatory body the Pension Fund Regulatory and Development Authority (PFRDA), said that the regulator is planning to permit NPS funds to invest in gold and silver exchange traded funds. He added that 1 per cent of the corpus under alternative investment category can be permitted for silver and gold ETFs.

  National Pension System funds may buy into more stocks and debt securities, as well as some gold and silver funds and more real estate vehicles. NPS, introduced two decades ago, oversees about $177 billion.

Data roundup: US job data mixed

US JOLTs job data were slightly encouraging as openings rose from 7227K in August to 7658K in September, though quits level fell from 3128K to 2941K (forecast 3150K). JOLTs layoff levels increased from 1781K to 1854K. The US Employment cost index fell from 0.9 per cent in Q2 to 0.8 per cent in Q3. US weekly job data released on Thursday were mixed as initial claims surged while continuing claims fell by 100K. Trade deficit shrank from $59.3 b in August to $52.80 billion in September.

ETF and COMEX inventory: ETF inflows a major bullish factor

As of December 10, total known global silver ETF holdings stood at 845.09 MOz, highest since July 2022.

 

Silver ETF holdings, up 18.02 per cent YTD (129.09 MOz which is equivalent to 4015 tons), have risen for four straight weeks.

China silver-fund manager cautions as risk premium soars

The manager of the UBS SDIC Silver Futures, China's only pure-play fund has issued fifth risk warning this month that investors may incur huge losses should the metal's rally lose steam as the fund is trading at a record premium of 12 per cent over its underlying asset SHFE silver contracts which suggests speculative interest in the metal.

Silver lease rate: Elevated

One-month LBMA Silver lease rate stands at 6.70 per cent, highest since October 24, which shows a tight inventory situation as historically lease rates have been around 0.3 per cent-0.5 per cent.

Upcoming data and events: Nonfarm payroll and BoJ in focus

Major US data on tap include November nonfarm payroll (Dec. 16), retail sales advance (Dec. 16), S&P PMIs (Dec. 16) and November CPI (Dec. 18). Out of Asia, focus will be on China's retail sales, industrial production and home prices (Dec. 15). Major Eurozone data releases include PMIs (Dec. 16) and CPI (Dec. 17). European Central Bank and Bank of England will deliver their monetary policies on Dec. 18, while Bank of Japan will announce its much-awaited monetary policy decision on Dec. 19, wherein it is expected to hike its benchmark rate by 25 bps to 0.75 per cent, its second hike this year following a rate hike of 25 bps on January 24. Possibility of carry trade unwinding is a potential source of volatility and bearishness.

Outlook

The grey metal has reached our long-term target of $60 and expected near-term target of $62-$65.

  Fundamentals continue to be supportive of higher prices, though in short-term a healthy consolidation is not ruled out.

  Fresh buying at current levels could be fraught with risk. However, we note that a decisive move above $65 could bring $70-$72 levels in focus. Support is at $62/$60.

  (Disclaimer: Praveen Singh,  head currencies and commodities at Mirae Asset Sharekhan. Views expressed are his own.)