Silver prices fall sharply as USD surges on hawkish Fed; may test $60

Silver was trading at $66, down 7.78 per cent from June 17 high of $71.57.

Silver Performance  Spot silver prices, following a sharp rally of $10 in a span of six days since hitting cycle low of $61.50 on June 11 as oil prices slumped on US-Iran preliminary deal have come under huge pressure due to a hawkish shift by the US Federal Reserve.  The white metal, currently trading at $66, is down 7.78 per cent from the June 17 high of $71.57. The metal fell nearly 3 per cent on Thursday as the US Dollar (USD) surged on hawkish Fed.    Geopolitics and oil  The US President Donald Trump has signed an agreement with Iran on Wednesday, immediately allowing Iran to sell its oil freely. Iran will remove all the military obstacles and demine the Strait of Hormuz within thirty days.  As per the agreement, Iran has agreed to temporarily reopen the Strait of Hormuz. The ceasefire is to be extended for at least another 60 days of negotiations as the US ends the US blockade and US forces pull back. The US will temporarily lift sanctions on Iranian oil exports.  Other points in the MoU include end of hostilities in Lebanon; Iran to get access to a $300 billion reconstruction fund should a final deal is reached; and eventually lifting of all the sanctions against it.  Contrary to the US's version of agreement, Iran insists that Iran and Oman will regulate the traffic flows through the Strait. Iran will not charge ships for using the Strait for 60 days, but Iran's top negotiator said Wednesday that there would be a fee for transit after that.  Iran has reaffirmed its previous commitment to never develop a nuclear weapon, though it is an old commitment. Questions concerning Iran’s stockpile of highly enriched uranium, further enrichment efforts, or any kind of international monitoring, are to be sorted out in the extended ceasefire period. Iran will be allowed to have ballistic missiles.  Risk to deal lingers as Israel has given no commitment to stop its War in Lebanon.  Crude oil prices slumped further Thursday. Brent crude oil at $77 was down 3 per cent for the day; oil is down 38 per cent from its cycle peak reached on April 30.  Data roundup  The US retail sales advance rose 0.9 per cent m-o-m in May that beat the estimate of 0.6 per cent and was higher than the prior reading of 0.4 per cent. Even control group sales at 0.7 per cent m-o-m topped the median forecast of 0.4 per cent. Initial jobless claims slid from 230K to 226K (forecast 225K) as continuing claims were up from 1786K to 1810K.  Central Bank watch  The US Federal Reserve, in its monetary policy declared on June 17, kept the overnight Fed fund rate unchanged at 3.5 per cent-3.75 per cent but it was a hawkish pause as the FOMC statement removed the easing bias and many members see higher rates on the horizon.  FOMC's Summary of Economic projections see at least one quarter point hike this year. Most importantly, Warsh, asserting the goal of returning to 2 per cent inflation, upheld the Fed's independence as he was not accommodative in his monetary policy stance.    ETF and COMEX inventory  Total known global Silver ETF holdings continue to decline. Holdings, currently at 786MOz, are down 5.52 per cent (1430 tons) since the start of the Iran war. ETFs have seen a net outflow of 8.81 per cent YTD, which translates into a net outflow of 2364 tons.  Registered COMEX Silver inventory is up from 75.71 MOz in April to 86.27 MOz currently, though it is down 57 per cent from the record peak of 201 MOz seen in September last year.  LBMA lease rate  One-month LBMA lease rate at 0.23 per cent does not reflect any supply concerns as it is around the historical average of 0.3-0.6 per cent and much lower than 6.16 per cent lease rate seen in February.  China's Silver  China's silver price at Shanghai Gold Exchange is around $75/Oz. Silver inventory at SGE has jumped from cycle low of 252 tons in March to presently 868 tons; however, inventory level is still at a decade's low.  Outlook on Silver  A firmer US Dollar, as the US Federal Reserve surprised the market with its hawkish pivot, is expected to weigh on the metal. Markets are pricing at least one rate hike by the year-end.  ETFs flows remain uninspiring as rate hike concerns grow, which is exerting intense downside pressure on silver, a rate sensitive asset. The metal is expected to test support around $60 in near term. A decline to $55 is not ruled out. Resistance is at $69/$72.  (Disclaimer: This article is written by Praveen Singh, head of commodities, Mirae Asset Sharekhan. Views expressed are his own.)