Why the Price of Silver Could Shatter a 3-Year High by February

The price of silver might not be finished correcting yet, but it will be soon. And when it does, silver prices in 2020 could smash a three-year high and challenge its five-year top...

Ever since silver peaked around $19.50 in early September, investors have wondered how much consolidation lies ahead.

In my silver update last month, I suggested that silver could see more correcting or consolidating. And that's what happened.

Silver's been forming a series of lower highs and lower lows, a typical downtrend technical pattern.

But with the Fed's newly expanding balance sheet, stocks have soared to new record highs. The 10-year Treasury bond hit a clear bottom the same day gold and silver peaked.

We've been back to a risk-on stance as the White House hints at progress towards a U.S.-China trade deal.

Despite this, some silver indicators are suggesting there may not be much downside left. Here's what you need to know.

Why the Price of Silver Could Soon Rise

Silver prices are down only down about 3.25% in the last month. They peaked at $18.15 on Nov. 3, then gradually sold off to the current $17 level.

But that doesn't change the fact that the precious metal is up 17.2% since late May. And the latest developments in U.S.-China trade could push the price of silver even higher.

In late October, the silver price moved 3% in a single day as industrial demand was looking bright in the context of a possible U.S.-China trade deal.

Ryan McKay, commodity strategist at TD Securities, said that talks of a phase one deal have made the industrial metals market look "more optimistic." Specifically, he said investors have been "under-positioned in silver and near maxed positioning in gold."

This means it's likely that as industrial metals investment grows, it will mostly go into silver rather than gold.

A few days earlier, billionaire precious metals advocate Eric Sprott said precious metals prices at current levels are gaining acceptance, and the sector could be in for more surprises.

According to Sprott, there could soon be a "shortage of silver," pointing to the amount of silver going into ETFs and India.

He's referring to how silver recently reached all-time highs in the Indian rupee. Indians were expected to pile into silver for gifts during the Diwali Festival Season, as silver imports were up 72% year over year.

As you can see below, India represents a significant portion of the global silver demand.

At 1.34 billion and a massive affinity to precious metals, if Indians keep growing their demand for silver, shortages will come fast and furious.

That's going to come at just the right time too, because the technical indicators are showing silver prices are ready to pop.

The charts I'm looking at show the price of silver could breeze past its three-year high and challenge its five-year high.

Here's why...

What the Charts Say About Silver Prices

[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]The U.S. Dollar Index remains in a gradual uptrend. This is due mostly to its safe-haven status and the clear interest rate differential between it and most other major currencies.

As you can see in the chart below, the DXY remains well within its upward trend channel, having bounced back above the 50-day moving average even after the Fed's October rate cut.

Fed Chair Jerome Powell's indication that further cuts could be some way off depending on data probably supported the dollar. Ongoing strength from here would not be a surprise.

For its part, silver has been acting relatively well, despite its pullback of the last two weeks.

In this next chart, you'll see that silver recently broke support at $17 but quickly regained it. The 50-day moving average has turned down, suggesting more possible weakness in the near term, though the relative strength index (RSI) and moving average convergence divergence (MACD) look quite oversold. A retest of $16 is not out of the question.

Up next, you'll see how silver stocks have clearly bucked the weakness. Once the Fed rate cut was done in mid-October, silver stocks rose steadily, with only minor weakness in early November, unlike silver itself:

But the ratio of silver stocks to silver is especially revealing. Since Oct. 14, silver stocks have done markedly better than silver itself. This suggests that the market may be realizing silver is dramatically undervalued, and the stocks leading the metal could be forecasting a rally ahead.

But here's a relationship that's notable for its clear upward trend. Let's compare silver stocks to gold stocks.

Ever since the start of August, silver stocks have been clearly outperforming their gold counterparts. In that time, SIL is up 8.8%, while GDX is down 2.4%, for an 11.2% outperformance.

Consider too that over the past year, the S&P 500 is up 16.4%, while SIL is up twice as much at 32.2%. It's depicted in this chart:

This, too, could be signalling that silver's time is coming. And with the gold-to-silver ratio still at historically very high levels, potentially hitting overhead resistance at 86.6, its 200-day moving average, we could well see a silver surprise as Eric Sprott has hinted.

As the following chart - courtesy of Sentiment Trader - shows, we are headed for the strongest seasonal part of the year. November, January, and February typically show strong returns for silver:

With all this in mind, I think we could see silver test the $18 level before 2019 is out. And maybe it could even hit a new 52-week high past $19.50 before the end of February, a three-year high.

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