Silver: Unjustified rally

Following Friday’s somewhat weaker-than-expected US labour marker report, silver rallied strongly. Prices were up almost 3%, closing at $19.4 per ounce. Unlike other markets, silver did not give back its gains after the US dollar recovered and US Treasury yields rebounded.

Also taking into consideration unchanged market-based probabilities for an interest hike in the United States later this year, the rally appears unjustified. We reiterate our bearish view and our short recommendation as we continue to see significant downside for silver prices going forward.

Support from the gold market should fade as growth risks are receding and the US dollar is strengthening while futures market tailwinds should turn into headwinds once short-term speculative traders decide to take profits on their excessive long positions.

Beyond a short-term correction, we see further medium to longer-term downside for silver as the market should remain oversupplied against the backdrop of struggling industrial demand, sluggish jewellery demand and receding investment demand.

Silver rallied on Friday, shrugging off a recovering US dollar and rebounding US Treasury yields.

As we believe the rally was unjustified, we reiterate our bearish view and our short recommendation. We see downside for prices on receding growth risks, a strengthening US dollar and profit taking in the futures market.

Carsten Menke is Commodities Research analyst at Julius Baer

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