Silver soars 98% YTD, rally likely to extend; here's how to trade

Performance:

On December 4, spot silver traded between $56.49 and $58.76. The white metal, at the time of writing this article, was changing hands at $57.14, down 2.3 per cent for the day as investors book profit after a stunning 8-day rally that saw the metal surging over 21 per cent since Nov. 21 low of $48.64. The metal is up nearly 98 per cent for the year.

Silver ETF and COMEX inventory:

As of December 3, total known global silver ETF holdings stood at 839.54 Moz-- a fresh cycle high as the ETF holdings have risen to the highest level since July 2022.

 

 

ETF holdings, up over 17 per cent year-to-date (Y-T-D) (3856 tons), have risen nearly 20 MOz (620 tons) since November 21 as the Fed Rate cut probability spiked from 24 per cent to near certainty. Eligible COMEX silver inventory at 317.25 MOz is down around 7.3 per cent from the cycle high of 342 MOz seen on October 3, as some metal had been sent to London to address the inventory tightness issue.

Other factors instrumental in this blistering silver rally:

Apart from huge ETF inflows, other factors like the elevated LBMA silver lease rate and quickly depleting Chinese silver inventory are also boosting the grey metal.

 

One-month LBMA silver lease rate at 5.7 per cent, although down sharply from 35 per cent as seen on October 9, is much higher than the historical standard of 0.3-0.5 per cent. SHFE on warrant silver stock plummeted from 1,454 tons in February to a decade low of 551 tons on November 2, a steep decline of 62 per cent, before recovering to 654 tons presently. Similarly, Shanghai Gold Exchange silver inventory fell to a nine-year low. 

ALSO READ | Gold trades in a tight band with constructive bias; dip buying favoured 

Data roundup:

US weekly jobless claims fell to 191,000, a three-year low, against the forecast of 220,000 as even continuing claims fell from 19,43,000 to 19,39,000 against the estimate of 19,63,000.

 

The ADP Employment Report released on December 3 showed that US private-sector employment fell by 32,000 jobs in November against the forecast of a rise of 10,000 jobs, which is the worst fall since 2023. 

 

Weak job data led bounce in gold was checked by ISM services coming in at 52.60, that beat the forecast of 52, though the employment Index contracted for the seventh straight month.

Indian Rupee falls to a record low:

Beset by uncertainty over the US-India trade deal, outflows and a record $41.70 billion trade deficit in October, up from $26.7 billion in August, as domestic investment demand for precious metals has sharply picked up, the Indian Rupee has plummeted to a record low against the US Dollar.

 

RBI has stepped aside as it probably wants to build reserves rather than sell to support the beleaguered INR. RBI's forex assets rose by $600 million in the week ending November 21. Tax collections show that lower GST rates are boosting foreign goods demand rather than demand for domestic goods.

US Dollar Index and yields:

The US Dollar Index has fallen sharply from its recent high of 100.40 seen on November 21 as the Fed leaders, including Governor Waller and NY Fed President Williams, called for a rate cut in December. At the time of writing this article, the US Dollar Index was trading around 98.92, up around 0.1% for the day.

 

Two-year yields that fell two basis points (bps) to 3.49 per cent in the week ending November 28 are currently hovering around 3.52 per cent, up 1 per cent for the day. Ten-year yields at 4.10 per cent are up by around 0.75 per cent for the day.

 

Both two-year and 10-year yields have risen around 2 per cent from their recent lows reached on November 26, due to heavy corporate bond issuances and reassuring ISM services and weekly job data. 

 

Meanwhile, Japan's bond yields continue to move higher on proposed fiscal stimulus, December rate hike possibility and continuing tiff with China. Ten-year JGB yields rose to 1.94 per cent, the highest since July 2007. 30-year JGB yields surged to a record high of 3.44 per cent before easing by nearly 1 per cent.

December Fed rate cut probability:

December Fed rate cut probability, although down from 90 per cent to 87 per cent since yesterday, remains quite high as markets price in a December Fed rate cut. 

Geopolitics watch:

Ukraine-Russia peace deal remains elusive as Russian President Vladimir Putin said some points in a US-backed peace plan to end Moscow’s war were unacceptable to him.

US President Donald Trump reiterated that the US would start striking alleged drug cartels on land in Venezuela very soon.

Upcoming data and events:

Investors will closely monitor US PCE Price Index (Sep.), real personal spending (Sep.) and University of Michigan Sentiment (Dec. prel.) data to be released today. JOLTs job openings data (October) will be released on December 9. The Federal Reserve will announce its monetary policy on December 10. It is widely expected that the central bank will cut the Fed Fund rate by 25 bps.

 

The Fed's communication blackout period will last until December 12, so there will not be any guidance from the Fed officials until then.

Outlook:

Silver, having breached the strong double-top resistance around $54.50, is on a strong footing to extend its gains in the coming weeks on huge ETF inflows, inventory tightness, the Fed rate cut, and heightened geopolitical tensions. Buying the dips with a stop-loss below $54 remains the preferred strategy in short term. The grey metal is expected to rise to $62-$65 in the coming weeks/months. 

 

Note: Investors need to watch out for INR volatility.

 

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