Silver, Gold and Dollar Correlations


The opportunity for a significant silver price rally during the strengthening of the US Dollar looks very low, but when there is a weakening of the US Dollar, the pace of the silver rally can become unstoppable.

There is a significant relation between the silver price and US Dollar. The range of movements of the US Dollar today is far greater than in previous years. This is weighing on the price of silver. Increasing risk and speculation leads to a greater decline at the end of the credit cycle, which in turn requires greater stimulus/bailout to keep the system running and often makes the Dollar unstable.

Credit extension and speculation from early 2000 to 2008 were enormous, and caused a massive bailout and stimulus needed during the 2008 financial crisis. Silver prices reacted well at that time, rising from around $9.00 to nearly $50.00.

The large stimulus that is reflected in a significant increase in the Fed’s balance sheet is arrangements for credit extension and continued speculation, which leads us to 2020, where greater stimulus is needed given the pandemic impact outside normal scenarios.

Based on the stimulus since the end of 2019 to the present day, silver has benefited.

XAGUSD reached a retracement above 78.6%, turning from $11.27 to $17.62. This upward movement recorded a growth of 56.32%. Indicator sentiment moved positively, and prices are still above the 200-day moving average.

Most of the reasons why the price of silver strengthened stemmed from a statement made by Jerome Powell, the Fed’s chairman. Powell said that the US economy will continue to be weaker until 2021. He also estimates that the economy will contract more than 30% in the current quarter. This is what is exciting the metal market, because most traders expect banks to increase their quantitative easing programs. Some also expect banks to move to negative interest rates to protect the economy.

As the market tends to move into precious metals because of Fed policy concerns, this will drive inflation. Precious metals tend to be inflation hedges because prices rise when other prices also rise.

The price of silver has been underestimated so far, because it is below its true value. One way to assess the value of silver is to consider the ratio of gold to silver. In recent months, the ratio has jumped to the highest level. Because of that assessment, traders rushed to silver, because they expect prices to soar while gold prices remain less, moving to the highest level since 2012.

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Ady Phangestu

Analyst – HFIndonesia

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