Silver Prices: Expecting A Bearish Breakout

Silver prices remained very choppy for the past month which complicates trading. However, when prices finally breach the $13.61 to $14.62 range we can probably enjoy a healthy trend.

In the case of a break to $14.62 silver prices may reach $15 and $15.50 with the latter level acting as support during October. If the price breaches the December low of $13.61 prices may reach the July 29, 2009 low at $13.17 and then the July 13 low at $12.46.

Until a break occurs, I see the price continuing to trade sideways.

Will It Break Higher or Lower?

My base scenario is for silver to break lower. This is because the primary driver at this stage is the USD, and I see it gaining further in the months ahead.

Already today, U.S. interest rates suggest that the Dollar should be stronger vs. its major peers. I also lean towards the Fed’s view of 4 rate hikes in 2016 vs. the markets expectations of two rate hikes (according to overnight-index-swaps). This should will lift short-term rates further and give the dollar a boost.

Will the U.S. economy be able to cope with further rate hikes? At this stage I think it will as U.S. inflation is rising, which leaves inflation-adjusted interest rates relativity unchanged.

What may hinder further rate hikes?

Today, we are seeing a contraction of U.S. industrial production (-1.17% YoY) on the back of soft energy markets and a very strong dollar. The leading indicator, ISM manufacturing, is also not showing any signs of bouncing. This implies industrial production should remain soft. This could become a bigger problem in the weeks and months ahead if the Dollar keeps on gaining. And could eventually trigger losses in other sectors of the economy and the Fed may be forced to give up their plans to hike rates.