Silver Prices: The Bigger Picture

February 10, 2020

New York (Feb 10)  There’s an inverse relationship between the strength of the US dollar and the price of silver. This is a counter-intuitive idea and stems from the fact that the United States dollar is the world’s reserve currency.

In general, when the dollar is on the rise, it creates short-term downward pressure on the prices of commodities. Another way of looking at this is that when the dollar is strong, it takes more foreign currencies to purchase gold or silver. That makes the items more expensive, lessening demand. The converse, of course, is true as well. A weakening dollar will make the commodities cheaper, and the increasing demand will, in theory, drive up commodities prices.

At the same time, many savvy investors watch for times when the dollar is strong to average down their holdings by finding bargain prices for their purchases.

What is the bigger picture?

Technical analysis often helps to demystify complex fundamental relationships. It provides an easier grasp on how to practically act upon counter intuitive market behavior.

The bigger picture – The dollar to silver relationship long term:

Since the introduction of the European common currency called euro (EUR) the US-Dollar index is measured by the change in value against six currencies. Those are the euro (EUR = 57,6%), the Japanese yen (JPY = 13,6%), the British pound (GBP = 11,9%), the Canadian dollar CAD = 9.1%), the Swedish Krona (SEK = 4,2%) and the Swiss franc (CHF = 3,6%). As you can see, the most influence towards the price of the US Dollar Index is coming from the daily market movements between the dollar (USD) and the euro (EUR). It is therefore prudent to use the EUR/USD pair as a proxy when questioning the trend direction of the US dollar.

In phase one the dollar was very weak. This is represented by the EUR/USD currency pair (orange line) having a multiyear bull run. It advanced by a hundred percent from $0.82 to $1.60. With an approximate three year delay, silver prices (blue line) enjoyed a mutual price advancement. It moved from US$4.05 to US$49.83, which equals a 1.130% gain.

In phase two the EUR/USD currency pair declined from its US$1.60 highs to a multiyear support zone near the US$1.05 price level. Just like in phase 1 silver has found it extreme price level within a three-year delay of EUR/USD. It declined as well form its highs of US$49.83, finding support around the US$14.00 price zone.

Phase three is speculative in nature. The time delays of roughly three years represented through a, b and c do seem intriguing. Both the euro and Silver have found supporting supply and demand zones. This turning point hypothesis would be in alignment with fundamental reasoning.

The bigger picture

Fundamental analysts are often head to head with technical analysts. Our rational minds have a need to find rhyme and reason within event chains. We find it beneficial to approach the markets from various angles. Why leave out good charting? “A picture is worth a thousand words” and might just save some time.

The sum of both, macro and micro fundamental forces, can easily be confusing. This because multiple forces pulling in various directions and many moving parts creating to many variables. It is helpful to bring a larger time frame chart to the mix. Creating a singular view through a chart can summarize a complex intellectual structure into a clearer scenario.

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