Silver Price Talking Points:

Amid the news that the next round of US tariffs on imported Chinese goods would be delayed from September 1 to December 15, safe haven assets are being quickly sold off.

As US Treasury yields rise alongside global equities, gold and silver prices have taken a hit as demand for precious metals has been sapped.

The prospective failure of the silver breakout now threatens a deeper pullback if prices fall back into the sideways consolidation from late-July/early-August.

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Volatility is roaring across global financial markets again, but this time, on good news: the US-China trade war appears to be moving into another state of détente. As news emerged in Chinese media that American-Sino negotiations will resume in two weeks, US President Donald Trump announced that he would push back the implementation of 10% tariffs on $300 billion of imported Chinese goods.

Tariff News Weighs on Fed Rate Cut Odds

The ensuing market reaction has been a dramatic one, thanks in part to a violent repricing of Federal Reserve interest rate cut odds over the immediate horizon.

Yesterday, according to Fed funds futures, there was a 100% chance of a 25-bps rate cut and a 32% chance of a 50-bps rate cut in September; now, those odds are 100% chance of a 25-bps rate cut and a 15% chance of a 50-bps rate cut.

US Treasury yields have turned higher as a result, with the 2-year yield adding as much as 9-bps while the 10-year yield added as much as 6-bps.

Why Do ‘Real Yields’ Matter to Silver Prices?

The shifts in US Treasury yields around the latest US-China trade war news is directly undermining the most appealing aspect of silver: like gold, environments that produce falling real yields tend to be the most bullish.

Real yields are inflation-adjusted yields: in this case, the US Treasury 10-year yield minus the headline inflation rate. Why does this matter? Investing is all about asset allocation and risk-adjusted returns. On the asset allocation side, it’s about achieving required returns given the investor’s wants and needs.

If inflation expectations are rapidly increasing, you would expect to see fixed income underperform: the returns are fixed, after all. Why would you want to have a fixed return when prices are increasing? On a real basis, your returns would be lower than otherwise intended.

For example, let’s say the US Treasury 10-year yield is currently 2.5% and headline inflation is 2%. The nominal interest rate is 2.5%, and the real interest rate is 0.5%. Then all of the sudden if the US Treasury 10-year yielddrops to 1.6% while inflation holds steady, the real interest rate would move to -0.4%.

Falling US real yields means that the spread between Treasury yields and inflation rates are decreasing. If precious metals yield nothing (no dividends, coupons, or cash flows), they would best suited to rally when US real yields fell.

Environment Sours Quickly for Silver Prices

If silver’s appeal as an inflation hedge relative to the US Dollar increases not in an environment when inflation is just rising, but when inflation is rising and nominal interest rates are not rising at the same pace; or, in sum, when US real yields are dropping. It then stands to reason that environments defined by rising US real yields would thus be bad for silver prices – which is exactly what we’re seeing unfold today.

The dramatic turn of events warrants a reconsideration of recent bullish prognostications for silver prices.

SILVER PRICE TECHNICAL ANALYSIS: WEEKLY CHART (AUGUST 2013 TO AUGUST 2019) (CHART 1)

After making a number of key breaks to the topside, silver prices have started to cool off. The key break that transpired last week constituted a move through the descending trendline from not only the April and September 2017 and the June 2018 swing highs, but the 2013 and 2016 swing highs as well.

But the tariff news today has eliminated the gains, and now a rather pronounced neutral doji candle appears to be forming on the weekly timeframe – typically seen as a sign of market participants reassessing the situation.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2016 TO AUGUST 2019) (CHART 2)

In our silver price technical outlook last week it was noted that the “sideways range between 15.904 and 16.631” was beginning to breakout to the topside, and that “the measured move higher outside of the consolidation calls for silver prices to climb to 17.358 in the near-term. Such an advance would see silver prices run back into the highs from April and June 2018 near 17.337.”

Indeed, earlier today, silver prices achieved both of these topside targets, reaching as high as 17.489 before turning lower.

SILVER PRICE TECHNICAL ANALYSIS: DAILY CHART (DECEMBER 2017 TO AUGUST 2019) (CHART 3)

Like the nascent weekly candle, the daily candle is offering up what appears to be a doji at the time of writing. Even though silver prices remain above their daily 8-, 13-, and 21-EMA, and both daily MACD and Slow Stochastics pointing higher again in bullish or overbought territory, there appears to be significant scope for pullback in the near-term.

Traders should be watching for a close back into the late-July/early-August consolidation below 16.631; below here, and the tenets of a near-term top would be in place.

IG Client Sentiment Index: Spot Silver Price Forecast (August 13, 2019) (Chart 4)

Spot silver: Retail trader data shows 88.2% of traders are net-long with the ratio of traders long to short at 7.45 to 1. The number of traders net-long is 0.9% higher than yesterday and 4.6% higher from last week, while the number of traders net-short is 13.7% higher than yesterday and 25.4% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests spot silver prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current spot silver price trend may soon reverse higher despite the fact traders remain net-long.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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