Silver price began the new week under negative pressure; trading in the red for the second consecutive session. Granted, it has recorded three weeks of gains that boosted it to a 12-year high late last week.
After surging to $32.71 on Thursday, it’s highest level since December 2012, it has pulled back to $31.43 as at the time of writing. Fed’s rate cuts and China’s stimulus package have fuelled the precious metal’s chase along gold’s price rally. Even so, concerns over China’s industrial sector is limiting its upside potential.
Gold/silver ratio
The relationship between gold and silver has largely contributed to its rallying to a 12-year high on Thursday last week. Since the beginning of September, gold price has surged by over 6% to a fresh record high of $2,685.15 on Thursday. While it since pulled back, it remains close to this peak at $2,650.03 as at the time of writing.
The Fed’s massive rate cut, coupled with expectations of another jumbo reduction in November, has bullion set to record its best quarter in over eight years. Pressure on the US dollar has further supported the precious metals, making them cheaper for buyers holding foreign currencies.
As a precious metal, silver price is also benefiting from these bullish factors. Subsequently, the gold/silver ratio dropped to its lowest level since July late last week. It has since risen to 84 as at Monday.
The gold/silver ratio is a measure of the relative value between silver and gold. In other words, it determines the number of silver ounces required to purchase one ounce of gold. It is useful in highlighting the probable bottoms in the two precious metals’ markets. With the ratio still above 80, silver remains rather inexperience relative to gold. The figures point to silver’s strength and probable rally as it seeks to outperform its expensive alternative.
Headwind to silver’s rally
Amid the bullish factors expected to boost silver price, concerns over the health of the Chinese economy persist. Data released by the National Bureau of Statistics on Monday showed that factory activity in the country contracted in September for the fifth month in a row.
The manufacturing PMI (purchasing managers’ index) was at 49.8 compared to the prior month’s 49.1. Granted, it surpassed analysts’ expectations of 49.5. However, a reading below 50 still indicates contraction.
At the same time, the Caixin PMI came in at 49.3 compared to August’s 50.4. This pointed to the highest contraction of China’s manufacturing sector in 14 months amid a rise in unemployment and weaker demand.
These figures are the latest in a series of disappointing economic data from China. The world’s second largest economy has been struggling from a real estate crisis and prolonged economic slowdown.
Last week, the government through the People’s Bank of China (PBoC) intensified efforts to revive the country’s economic growth momentum. Nonetheless, the latest data are an indication that the efforts will take a while for them to bear fruits.
As an industrial metal, silver price will likely have its upward movement limited by these concerns, at least in the short term. In the ensuing sessions, the duo-status metal will likely react to the scheduled industrial data from the US and Japan; the top and fourth largest economies in the world. Besides, in its position as a precious metal, it will be influenced by the US non-farm payrolls and unemployment rate figures set for release later in the week.
Silver price analysis
The daily chart shows that the price of silver has bounced back in the past few months. It soared from last year’s low of $19.8 to a high of $32.46 last week. As a result, the stock has remained above the 50-day and 100-day Exponential Moving Averages (EMA), meaning that bulls are in control.
Silver’s daily chart is also showing mixed signals. On the positive side, it has formed an inverse head and shoulders pattern, which is a popular bullish sign.
It has also formed a double-top chart pattern whose neckline is at $26.40, its lowest point in September. Therefore, the key point to watch will be at $32.71, its highest point this month.
A break above that level will point to more upside since it will invalidate the double-top pattern that has been forming. Such a move will see it rising to the next psychological point at $35.
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