The silver price tumbled on Thursday as investors reflected on the change of tone by the Federal Reserve. It dropped to a low of $22, which was the lowest level since December 16th last year. It has crashed by about 6% from its highest level in December.

Hawkish tone

Silver is an important metal used in the manufacture of many things, including cookware, solar panels, and semiconductors. 

Therefore, in most cases, silver tends to do well when the global economy is performing well since that implies higher demand.

As a result, the uncertainty of the global economic recovery led to the sluggish performance of silver in 2021. During the year, the price remained inside a narrow range of between $28 and $21.

Unlike other industrial metals like copper and lead, silver is also a precious metal that is impacted by the actions of the Federal Reserve. 

Since November, the silver price has crashed by about 10%. This period coincides with when the Federal Reserve started to taper its asset purchases. In that meeting, it reduced the size of asset purchases from $120 billion to $105 billion. 

In its December meeting, the Fed conceded that it was wrong its call that inflation will be transitory. As a result, the bank decided to increase the size of its asset tapering to $30 and hinted that it would hike interest rates in 2022.

Minutes of that meeting showed that members of the Federal Open Market Committee (FOMC) were more hawkish. In summary, the minutes showed that the bank was prepared to move quickly to end the era of easy-money policies. 

Fed tightening

The Fed has judged that fighting inflation is more urgent than waiting for the impact of Omicron on the economy. For example, data published in December revealed that the personal consumer expenditure (PCE) increased to the highest level since 1982. This is an important number since it is the Fed’s favorite inflation tool.

The labor market has also tightened. On Tuesday, data by the Bureau of Labor Statistics (BLS) showed that the US has over 10 million vacancies while millions are resigning. 

On Wednesday, data by ADP showed that the economy added in excess of 800k jobs in December as the Omicron variant spread.

And on Thursday, the BLS showed that the number of Americans filing initial jobless claims was about 203k. Although this was a slight increase, the number remains at the lowest level since the pandemic started.

On Friday, the BLS published the official non-farm payrolls numbers. These numbers showed that the economy added 199k jobs in December while the unemployment rate declined to 3.9%. Wages also jumped sharply in December.

Therefore, the Fed will be confronted by three facts in its meeting later this month. The Omicron has mild symptoms, the labor market has tightened, and inflation is still surging. As such, it will most likely accelerate its tightening, which will affect silver prices.

Still, fundamentally, we cannot rule out a situation where silver bounces back as investors sell the rumors and then buy the fact.

Silver price forecast

The daily chart shows that the silver price has been under intense pressure in the past few weeks. Along the way, the metal has formed a small head and shoulders pattern. The current price is along the neckline of this pattern. It has also moved below the short-term and long-term moving averages. Therefore, in the near term, there is a possibility that silver will drop below $20.

The daily silver CFDs price chart formed a head and shoulders pattern

This week, we can see the confirmation of a bullish reversal as the bulls presently target. With RSI 14 below the SMA and reading at 47.3, the bullish sentiment does not show any signs of stopping, which is also confirmed by MACD. If the trend continues beyond the current resistance level of $23.17, the next level bulls will be eyeing will be at $25.

Silver futures