Silver Price Forecast: Back into the Teens?

Silver has been stuck within a rangebound consolidation between circa $22 and $30 for the better part of the last year. Unfortunately, we are now observing signs that silver may be set to decline back as low as the mid-$18 range, before it continues any higher. Two notable signals are lining up to suggest that lower silver prices are ahead.

Higher Inflation = Lower Silver?

What is the fundamental backdrop for the expected drop in silver prices?

Higher inflation.

At first the idea that higher inflation would cause a drop in silver prices seems to make no sense. After all, silver is typically considered an excellent inflation hedge over the long term.

However, we are not discussing the long-term here: we are discussing the next 6 – 18 months. Specifically, over the last half a year, the market has been caught in a paradigm whereby when high inflation figures are announced, the market then assumes that the Federal Reserve will act to thus lower inflation in the future. Thus, the markets are caught in a “high inflation = future low inflation” paradigm.

Consider the most recent consumer price index (CPI) figures released on July 13, which showed that core inflation had risen 4.5% annualized, the highest figure in nearly 30 years.  

And how did silver fare in the week following these record inflation figures?

Down 4.4%.

Again, we are not saying that this sell-off is rational. But we all know the saying about markets and rationality: “The market can stay irrational longer than you can stay solvent.” For the time being anyway, the market believes that high inflation is going to lead to future low inflation, and so it is selling inflation sensitive assets on the record inflation figures.

Calculating a Silver Price Target

How low could silver fall over the coming year amidst this irrational behavior?

A likely target is the $18.45 region.

Below we show the spot silver chart from 2020 through present. Note the primary pattern that silver has been in for the last year: a pennant triangle (blue). This pattern featured a series of rising lows and declining highs, and is considered a neutral pattern until violated by a break of either the upper or lower trendline. In this case, on the record high inflation figures, silver has violated its lower trend boundary to the downside:

We calculate targets for pennant triangles based on an amplitude of the widest part of the triangle, subtracted from the apex of the pattern. In this case, the amplitude is $8.40. Subtracting this figure from the apex of the triangle at $26.85 reveals a target of $18.45 (green).

Note that the $18.45 target also corresponds nearly exactly with the 61.8% Fibonacci retracement of the entire 2020 advance (dashed silver line), which comes in at $18.37. When two independently-derived target and support levels match up to within just a few cents, it increases the probability that this level will in fact be achieved.

What would it take to negate this negative outlook?

Silver would need to close above the upper boundary of the triangle for at least two weekly closes, presently at $27.75 and declining each week. This would show us that the negative bias has been overcome by new buyers. Barring such, the $18.45 target remains valid.

How long would it take this $18.45 target to be achieved?

6 – 18 months out is our best expectation.

What Do the Silver Miners Say?

Is there any confirming or denying evidence from other aspects of the precious metals markets that silver may in fact be heading lower first?

Yes, we need only examine the silver mining complex for such data.

Below we show the SIL silver miners fund, a basket of over 25 silver miners, compared to the price of silver below it, from 2015 through present:

Note how the silver miners are still below their 2016 peak level at 54 on the index. Meanwhile, the price of silver itself had risen nearly $9 above its respective 2016 peak of $21, to $30 per ounce just a few months ago.

Why were investors in the silver mining complex refusing to revalue their companies to $30 per ounce when silver itself has been consolidating near that level for the last year?

The explanation is that silver mining investors do not believe that current silver prices will last.

At the very most, the SIL fund is pricing in $22 silver. However, if in fact we see silver fall toward $22, it is likely that the silver miners will fall again further, and will begin pricing in sub-$20 silver.

Takeaway on Silver Prices

We must banish from our minds any idea that the markets need to be rational over any realistic period of time. The markets are not rational. Presently, higher inflation is being discounted as future low inflation, due to an expectation that the Fed will contain price increases as transitory.

Is there manipulation of the silver price? Most certainly there is.

However, neither irrationality nor manipulation are sufficient when it comes to actually profiting and protecting oneself from a potential sell-off in the silver price to come.

Those who ignore the above data do so at their own risk.

At www.iGoldAdvisor.com, we are positioning clients and research subscribers to protect themselves and even profit from a silver decline.

When the coast is clear, we will gladly reposition for a future advance in silver prices when the market becomes rational again – but it appears that time is not yet now.

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