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Silver prices correct from 11-year low, en-route towards $8/oz level and GFC 2008 lows

  • Silver trades around an 11-year low as investors cash in and dollar soars.
  • How much further can the dollar rise in a deflationary picture for the US economy?
  • US stocks may have further to fall, thus committed precious metals bulls could start to pull out. 

In an economic freeze, the price of an ounce of silver has dropped significantly for the month of March, despite its safe-haven qualities as markets crash deleveraging and margin calls kick in. Silver traded at an 11-year low and it plummeted below $12 an ounce yesterday, $11.61/oz due to a debilitating economic outlook and investors cashing on the late 2018 and 2019 bull trend in a flight to cash. However, that tide could start to turn.

A plunge in global confidence adds to the broad narrative we’ve seen in financial and commodity markets. Both the value of silver, when considering the gold/silver ratio and the possibility that long gold markets will seek to cash in and buy up silver at bargain-basement prices, and its safe-haven qualities should be appealing to investors as COVID-19 continues to spread exponentially outside of China. There is no telling how far stock markets will fall, but the 2008/09 lows are still some 65% away. 

As for the US dollar, its yield advantage has tumbled due to the coronavirus panic and how it threatens the US economy. Despite the recent surge, there is little reason for why the dollar should continue higher in a world that is dumping US treasuries as trillions in planned stimulus to combat the coronavirus impact spook investors and raise concerns for ballooning deficits. Indeed, for now, however, due to the deleveraging pressures, cross-currency funding flows and demand for liquidity are the dominant flows at the moment, so the dollar has soared to 102.68 in the DXY and could still run higher if the US stock market embarks on 2008 lows.

Long US Treasuries rises to become the industry's most crowded trade

However, context matters and the US could be facing a massive deflationary shock due to massive QE and money printing. We have already seen US bond yields rise to 1.276% in the ten-year yield as investors attempt to price in all these additional US dollars being added to the US deficit, doubling what is already a $1 trillion deficit. 

The inevitable surge in bond sales that will be needed to fund the deficit is where the risk now lies for the US dollar and where steep declines in the oil price and a surge in corporate default risks, add in helicopter money, it can only mean one thing - US deflation, weaker dollar. Investors will seek out gold and silver and the white metal has a great deal of catching up to do in the Gold/silver ratio. 

"As governments and central banks attempt to tackle the economic impact of the virus, particularly with interest rates already at the zero bound, we suspect that the call for unconventional policies will grow louder," analysts at TD Securities argued. "We suspect that this narrative will grow more prominent in the next phase of this ordeal."

Silver levels

Silver has reached an 11-yar low and a weekly support level. If it holds here, then the odds for a recovery increase. However, the situation is fluid and should stocks continue to fall then the committed bulls, at hat juncture, may also look to cash in which could create further downside pressures towards the mid $8/oz level and GFC 2008 lows. 

 

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