Silver (XAG) Forecast: Silver Outlook Hinges on Fed Signals and Yields

Spot Silver Gaps Higher on Iran Deal but Buyers Won’t Chase

Spot Silver (XAGUSD) gapped above the 200-day moving average Monday on the U.S.-Iran peace framework news and immediately stalled. The opening print hit $71.33. By late session it was back near $70.07. Two sessions ago this market was trading at $61.50.

Daily Spot Silver (XAGUSD) Technical Analysis

Spot Silver is trading higher late in the session on Monday after gapping the 200-day moving average on the opening. The initial reaction was to potentially bullish news but the inability to follow-through to the upside and the fact that it’s testing lows as we approach the close, suggests it still has work to do on the downside. Earlier today, it reached a high of $71.33, now it is trading near $70.07. Traders didn’t bite on a breakout move because they may have realized it was short-term overpriced. Just two sessions ago, it was trading at $61.50. A $10 premium is a little steep under current conditions.

Given the two-day range of $61.50 to $71.33, I think it’s due for a pullback to at least the 200-day MA at $68.43 or 50% to 61.8% of the move. That puts it back to $66.41 to $65.25.

The first leg up from a major low is usually fueled by short-covering. That’s probably what triggered the rally. Real buyers are likely to take a shot at the pullback with a lean at $61.50. No matter how you look at it, any buy is counter-trend, but it softens the risk somewhat when you can buy it close to the March 23 main bottom at $61.00 and 50% of the all-time high at $60.83.

On the upside, minor resistance is a 61.8% level at $71.84. The major resistance is a cluster at $74.63 to $75.19, followed by the 50-day moving average at $75.48.

Crude Collapse Set the Chain in Motion

President Trump announced Sunday night that the deal with Iran is complete. Pakistan’s Prime Minister Sharif said the formal signing is expected Friday in Switzerland. Trump authorized the reopening of the Strait of Hormuz. Crude dropped roughly 5% on the session and that is where the silver trade starts.

I’ve watched this chain enough times to know the sequence. Crude falls hard, inflation expectations come down with it, the 10-Year U.S. Treasury yield drops and the U.S. Dollar Index follows. All three moved Monday.

The 10-Year U.S. Treasury yield fell more than one basis point to 4.469%. The 2-Year U.S. Treasury yield declined more than two basis points to 4.06%. The 30-Year U.S. Treasury yield edged lower to 4.969%. The U.S. Dollar Index dropped to a 10-day low. That combination is what put a bid under Spot Silver (XAGUSD), not the geopolitics directly.

Silver Finds Support Despite Fed Uncertainty

Here is what makes Monday interesting. The same crude collapse that pulled yields and the U.S. Dollar Index lower also took pressure off the Fed to hike rates. The Fed starts its two-day meeting Tuesday. First meeting under Chairman Kevin Warsh. Better than 98% odds they hold at 3.50% to 3.75%.

The way I see it, as long as Treasury yields keep coming down and the U.S. Dollar Index stays soft, Spot Silver (XAGUSD) can hold ground even without the rate cut story supporting it. But that is a fragile setup. One hawkish comment from Warsh Wednesday and the yield and dollar support can reverse fast.

Industrial Demand Stays in the Background

Spot Silver (XAGUSD) is a risk asset in this market and it trades like one. Lower crude pulls manufacturing and transportation costs down, which helps industrial margins. That is a positive for silver demand on the industrial side. But nobody is buying Spot Silver (XAGUSD) Monday because of copper wire and solar panels. This is a rates and dollar trade right now and it will stay that way until Warsh speaks Wednesday and the market figures out what the new Fed chair actually thinks about inflation after a 5% crude drop.

Housing data and retail sales are due later this week and both feed into the rate picture. Strong numbers keep rate cuts off the table. Weak numbers bring them back. Spot Silver (XAGUSD) is going to react to those prints more than any peace deal headline from here.

What I’m Watching

Spot Silver (XAGUSD) is sitting in a no man’s land between the 200-day moving average at $68.43 and the 61.8% resistance at $71.84. The gap Monday was short-covering, not real buying, and the fade from $71.33 back to $70.07 confirmed it. Counter-trend buyers who missed the move are going to wait for the pullback into the $66.41 to $65.25 zone. That is where the risk-reward starts making sense with the March 23 main bottom at $61.00 sitting just underneath.

The Fed meeting Wednesday is the event. Warsh’s first press conference sets the tone for everything that trades on a rate expectation and Spot Silver (XAGUSD) is at the front of that line. Housing data and retail sales later in the week either confirm or complicate whatever Warsh signals. The Geneva signing Friday matters too because if the Iran deal falls apart, crude reverses higher and the entire chain that put a bid under Spot Silver (XAGUSD) Monday runs backward. Lower crude gave this market a window. Warsh decides how long it stays open.

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