Silver rallies five trading days in a row! Is China the catalyst?

After multiple red days in a row after breaking a key support level, silver has rallied for five trading days in a row setting up a key retest of broken support. At time of writing, silver is up over 8% since the beginning of this run-up starting August 18th 2023.

And what are the catalysts driving silver bullish momentum? Analysts are pinning this move on industrial demand and actions in China.

Industrial demand could be steadying but this requires solid US economic data showing the soft landing is working, and a firm dollar.

The dollar has been rising just as silver has been rising. The traditional inverse relationship between the dollar and gold is sometimes different. This is because silver has an industrial demand component meaning the precious metal will thrive in a sound economic environment as opposed to acting as a safe haven during economic troubles. Thus steady industrial demand will be reflected in the strength of the dollar which could be a key factor in determining this silver rally’s legs.

Just keep in mind that this Friday we will hear from Jerome Powell at the central bank’s annual policy event in Jackson Hole. Even though the previous Fed minutes showed that central bank policymakers are concerned about the upside risks to inflation translating to the possibility of more rate hikes, traders are still betting on the Fed keeping rates unchanged in September. This event will move the dollar.

Now the China factor is interesting.

Some analysts see silver renewed bearishness on fears of China’s economic troubles. We have had bad economic data, surprise rate cuts, a weaker yuan and Evergrande filing for bankruptcy in the US. This has raised questions on whether silver can sustain this momentum since China is the largest maker of solar panels that has been driving the demand for silver.

On the opposite end, some say the Chinese government’s further easing to support the faltering economy is squeezing shorts in certain markets. Ole Hansen, the head of commodity trading at Saxo Bank, said the recent move in silver is a short squeeze triggered by the People’s Bank of China (PBoC) intervention in the currency markets to support the yuan.

“The stronger yuan forced a focus change in copper, and with that also silver,” Hansen said

This is betting that the easing measures implemented will be enough to provide industrial support for silver.  Three weeks ago, speculative interest turned net-short by nearly 4,000, according to data from the Commodity Futures Trading Commission. Updated data published last week saw bearish sentiment hit its highest level since early March.

“So, short-covering and tailwind from a recovering industrial metal sector are [in my opinion] the key drivers, spiced up with added momentum following the technical break above the 21-, 50- and 200-day moving averages, all three located between 23.31 and 23.51,” said Hansen.

Analysts also noted that both silver and gold are benefiting from some safe-haven flows as disappointing economic data pushes U.S. bond yields off their recent highs. Although the Federal Reserve could maintain higher interest rates for longer, the hope that they are done raising rates is generating some bullish interest in gold and silver, according to some analysts.

Silver is ripping and testing a key resistance level. Looking to the left, you can see this zone is where the sellers step in. Silver broke above this zone in mid July 2023, but failed to sustain any follow through momentum. Silver is attempting to break out one more time. A close above the $25 important psychological zone is what bulls should be watching for a larger upside move and continuation momentum.

A close above $25 would set us up for a move to $26 and then eventually the next major resistance zone at $28. If silver fails to close above this near term resistance or closes below the lows near $22, we can see silver fall back to $20 and below.

With this recent move in silver seen as a reaction to China news, it is worth noting that copper is also having a similar five day gain move. The industrial metal also tends to closely follow China news.