Silver trading strategy today: Buying on dips suggested; Resistance at $30

Silver: Steady ahead of the US CPI data

Performance

Spot silver was steady around $28.30 at the time of the MCX closing. The MCX December silver contract at Rs 73,700 was up around 0.07 per cent. Silver erased most of its intra-day losses as the US yields dipped ahead of the UP CPI inflation data to be released tomorrow.

The US banks sounded alarm on their earnings, which is somewhat positive for the metal. JP Morgan, the biggest US bank, said that net interest income expectations for next year are quite high. Goldman Sachs group INC's Chief David Solomon said that the company's third quarter trading revenue may fall 10 per cent. However, as expected, there is some relief on the regulatory front for the US banks as US regulators are said to be cutting a proposed capital hike in half.

Wider markets were weaker as brent crude oil tumbled below $70.

Data roundup

China's trade balance data released Tuesday showed that while exports in August rose 8.7 per cent Y-o-Y (forecast 6.60 per cent), imports were up merely 0.50 per cent Y-o-Y Vs the forecast of 2.50 per cent. China's data released earlier showed that its core CPI inflation data in August moderated to the slowest pace in more than three years, while PPI slid 1.80 per cent Y-o-Y Vs the estimate of -1.50 per cent. The PPI data remained mired in deflation for the twenty second straight month in August.

UK's July employment data were largely mixed as average weekly earnings three-month/Y-o-Y came in 4 per cent; thus, falling short of the forecast of 4.10 per cent. Although three-month employment change at 265K jobs topped the forecast of 123K, payrolled employees monthly change was noted at -59K Vs the forecast of +25K.

US yields and the Dollar Index

US bonds continue to rally on the US economic concerns as rate cuts loom large.

The ten-year US yields fell to 3.642 per cent, a fresh cycle low; the two-year yields at 3.592 per cent also hit a fresh low. The US yield curve has become un-inverted now as the Fed is set to slash benchmark rates amid weakening job market.

The US Dollar Index, notwithstanding sharp decline in yields, was up 0.10 per cent to trade at 101.65.

Upcoming data

Market participants look forward to the crucial US CPI (August) data to be released tomorrow to gauge the pace of possible rate cuts by the Fed. CPI Y-o-Y is expected to show a sharp decline to 2.5 per cent from 2.9 per cent in July.

Silver ETF holdings

Total known global silver ETF holdings edged higher to 717.083MOz, nearly two-week high on September 9. COMEX silver inventory at 306.575 MOz is at a nearly two-year high level and yet to show any secular declining trend.

Outlook

Gold/silver ratio remains elevated at 88.88, sharply higher from the cycle-low of around 82, as industrial commodities have come under pressure. Gold has been outperforming silver on concerns about key economies China and the US. Of late, the white metal has been moving more in line with copper rather than gold. Although silver is expected to do better than industrial commodities, in the near-term, its upside maybe capped. Nonetheless, rate cuts are expected to support the metal.

Support for the metal is at $27.22/$26.70. Resistance is at $29.18/$30. It may test $30 level if US CPI reading is subdued.

Buying the dips is the preferred strategy, though weakness in industrial commodities is a point of concern; thus, strict stop-loss is a must.   

(Disclaimer: Praveen Singh is an associate vice president of fundamental currencies and commodities at Sharekhan by BNP Paribas. Views expressed are his own.)