Silver Prices Forecast: Is XAG/USD Poised for Correction Amid Divergence from Gold?

Silver Market Divergence

Silver prices experienced a notable decline last week, ending a three-week rally, contrasting with gold’s robust performance and record highs. This divergence highlights silver’s unique market position, distinct from gold, cryptocurrencies, and equities.

Last week, XAG/USD settled at $24.67, down $0.51 or -2.02%. This is down from a weekly high of $25.78.

Investment Flows and Demand Dynamics

Despite central bank buying strongly supporting gold, silver has not enjoyed similar demand, primarily depending on smaller speculators. Silver’s attractiveness as an investment was challenged last week by rising U.S. Treasury yields and a strengthening U.S. Dollar. The precious metal also faced competition from cryptocurrencies and equities for investment funds.

Federal Reserve Influence and Price Movements

Silver initially rose, reaching a three-month peak, influenced by the Federal Reserve’s expectation of three rate cuts in 2024. However, it closed the week lower as the U.S. Dollar firmed. A strong dollar makes silver costlier for holders of other currencies. Silver benefits from low interest rates due to its zero yield nature, with a 71% likelihood of a June rate cut currently priced in, up from 60% before the Fed’s decision.

Technical Outlook and Investment Trends

Silver’s surge into overbought territory indicates a potential cooling of its rally, with $23.85 as a crucial support level. Despite inflows into gold hitting a nearly year-high, silver has seen less participation in these investment trends.

Weekly Forecast and Market Sentiment

The weekly closing price reversal top suggests a selling pressure, indicating that investors might favor buying dips over pursuing rising prices. The evidence points towards family offices and proprietary trading shops having increased their short positions significantly prior to the FOMC meeting, potentially signaling a local peak for silver.

In conclusion, the divergence between silver, gold, stocks, and cash flows underlines the unique market position of silver. With central banks leaning towards rate cuts, nominal assets like stocks and gold have thrived, yet silver’s trajectory remains distinct, influenced by a different set of market dynamics and investor behaviors. The upcoming week’s market activity will be crucial in determining silver’s short-term direction.