The silver price has been relatively volatile lately. A few weeks ago, the price surged to above $30 amid the Wall Street Bets (WSB) frenzy. Since then, the price dropped by 13% to $25.83 and then crawled back to the current $27.
Silver and stimulus
The silver price has remained relatively steady above $25, mostly because of hopes of a stimulus in the United States. In January, Joe Biden unveiled an ambitious $1.9 trillion stimulus package that he hopes will help support the economy.
In the past few weeks, congressional leaders have attempted to come to an agreement about the size and specifications of this deal. While a lot is yet to be ironed out, there is a possibility that the deal will be passed in the next few weeks.
A large stimulus package will be positive for silver prices for three main reasons. First, in theory, it will lead to higher inflation as companies hike their prices. Since silver is an industrial metal, higher inflation tends to lead to higher prices. Indeed, recent price action in the bond market suggests that investors expect inflation to gain momentum. In the past few weeks, the ten-year and the two-year US government bonds have been in a strong rally.
Second, a large such stimulus coupled with the actions by the Federal Reserve will lead to a relatively weak US dollar. Since silver is traded in dollars, the two tend to have an inverse relationship, albeit mild. That’s because a weak US dollar usually leads to more demand for the metal.
Third, Biden has also committed to spending trillions of dollars to transition the US from fossil fuels to clean energy. This means moving from commodities like crude oil and natural gas to solar and wind. Silver is used widely in the manufacture of solar panels, which will lead to more demand. Indeed, analysts expect that the demand will rise to an eight-year high this year.
Risks to silver prices
There is a case to be made that silver prices will head higher. At the same time, there are risks that could affect prices. First, while supply declined in 2020, there are signs that many mines that closed because of the virus have started to reopen. Indeed, supply could beat estimates since silver is a cyclical asset, meaning that higher prices tend to attract more supplies.
Second, while a US stimulus package is a good thing for silver, in reality, it could lead to a swift economic recovery. A faster recovery at a time when inflation is rising means that the Federal Reserve will be forced to hike interest rates faster than expected.
In fact, more Fed officials like Raphael Bostic and Richard Kaplan have already started to welcome the idea of tightening. Higher interest rates tend to be negative for silver prices. For one, these rates tend to discourage borrowing.
Further, while silver is used in solar panel manufacturing, in recent years, the amount used has been declining. Indeed, according to S&P Global, this demand will start dropping this year.
Silver price technical outlook
The four-hour chart shows that the silver price has been moving sideways after forming a double-top pattern at $28.00. The metal is trading at $27, which is along the 38.2% Fibonacci retracement level. It has also moved below the 25-period and 15-period exponential moving averages (EMAs). Therefore, while the overall trend is bullish, the metal could retest the important support at $26 in the near term.