Here's What's Next for Silver Prices in 2018 After Last Week's Volatility

Silver prices in 2018 weren't immune from the stock market's turbulence last week. But silver prices held up better than stocks, and the brief downturn makes this an excellent silver buying opportunity...

As the stock sell-off gained intensity, silver eventually followed the rest of the market. It's a reminder that silver is not gold, and investors would be wise not to ignore its legendary volatility.

silver prices

Nonetheless, silver held up better than the S&P 500 did over the last five trading days.

While the stock market benchmark gave back 4.1%, silver lost only about 3.3%.

It's impossible to know whether this market correction is over. I expect to see stocks consolidate and trend sideways with higher volatility in the short term.

In fact, one indicator in particular says now may be the best time to buy the precious metal...

At the same time, the U.S. dollar has bounced back, and its recent rally is likely to continue.

For silver, the current market correction could be a minor headwind that will tame any gains in the very near term. But look for the silver price rally to return soon.

Silver Prices in 2018 Are Trending Upward

While silver prices dipped last week along with the stock market, they are clearly trending upward in 2018.

Both stocks and the U.S. Dollar Index (DXY) were stagnant on Tuesday (Feb. 6). The DXY hovered around 90 for most of the day. Silver sold down in early morning trading, opened at $16.67, and closed slightly lower, at $16.62

On Wednesday (Feb. 7), stocks fell again while the dollar rallied. The DXY worked its way up to 89.87 by 8:00 a.m., hitting 90.35 at 10:00a.m., where it spent most of the rest of the day. Silver opened at $16.59, then dropped in the face of a stronger dollar to close the day at $16.34

Thursday's (Feb. 8) stomach-churning 1,000-point decline in the Dow was accompanied by a dollar that moved sideways with a downward bias. The DXY spent most of the day around 90.25, while silver managed to gain. The precious metal opened at $16.29, then rose to $16.41 by 9:00 a.m., where it spent most of the day, finally closing at $16.39.

You can see the relative stability of the dollar compared to the S&P 500 in the charts below. The dollar gained and held its value as the stock market grew volatile.

US Dollar Index

And you can see just how quickly stocks fell in the S&P 500 during the same time period...

S&P 500

Friday (Feb. 9) brought a little more strength to the dollar, which hovered around 90.45 for the majority of the day. Stocks bounced back, as traders established new positions throughout the day.

The S&P 500 closed higher while silver, which opened at $16.32, followed a similar pattern.  However, silver only closed a penny higher, at $16.33.

On Monday (Feb. 12), silver opened near $16.40 but then jumped on dollar weakness to reach $16.55 by 2:00 p.m.  The DXY reached 90.40 just after 8:00 a.m. but by the early afternoon was back at 90.20, supporting a bounce in silver to $16.54.

But the silver price slide is actually a buying opportunity, since I see silver prices heading higher from here.

And I'm looking at one indicator that shows just when it's going to happen...

Silver Prices in 2018 Are Closely Tied to Gold Prices

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Last week, I suggested we could see the DXY rally a bit because it was oversold during the correction and the momentum indicators suggested it was turning higher.

USD

As you can see in the chart above, that's exactly what we got. These same momentum indicators suggest the dollar could still move a little higher, so maybe we'll get another 100 basis points in the DXY, to reach 91.5 to 92.

Unfortunately, silver quickly sold off this past week during the correction. Because this correction may not be over, I think it's still possible for silver to hit $16. We've moved a lot closer to that level, and any further strength in the dollar would likely push silver lower.

Additionally, recent price action has lifted the gold/silver ratio back to the 80 level.

Gold to Silver Ratio

However, going back to 2000, each of the three previous times this has happened, the ratio reverted back to the mean. I think we're likely to get that again, with the ratio heading towards 65.

If gold stays still, it would give silver a price target of $20.20. However, I think gold will head higher. If we get a gold/silver ratio of 65 with gold at $1,400, that would indicate a silver price target of $21.50.

On top of that, I think the dollar will head lower on balance, further supporting higher silver prices. As a result, a $20.50 silver price target by the spring is still realistic, with $22 likely later in the year.

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