The iShares Silver Trust (SLV) has crashed by over 17% from its highest level in 2024 and is nearing a bear market. It has dropped to $26, its lowest level since September 11 last year. So, why is the silver price falling, and is it safe to buy the dip?
Hawkish Fed and strong US dollar
The SLV ETF has crashed hard in the past few months because the Federal Reserve has changed its tune on interest rates and inflation.
In its December meeting, the Jerome Powell-led Federal Open Market Committee (FOMC) hinted that it would deliver fewer rate cuts in 2025 than expected. If this is correct, and if the Fed delivers quarter-point cuts, rates will range between 3.75% and 4% in 2025.
The hawkish Federal Reserve has led to a surge in the US dollar index (DXY), soaring from last year’s low of $100 to over $108 today. At the same time, government bond yields have continued soaring in the past few months,
Silver, like most commodities, is usually priced in dollars and often drops when the greenback is in a strong rally. That also explains why the gold price has retreated in the past few months.
The SLV ETF has also slumped as it sees higher outflows. As shown below, the fund has had outflows in the last two consecutive months, bringing the 2024 net inflows to $788 million
Catalysts for silver
Still, on the positive side, there are chances that the Fed will be more dovish than its previous guidance. For one, there are signs that inflation is moving downward faster than expected. This is based on the recently released PCE inflation data, which showed that the figure fell to 2.3%. PCE is a better inflation gauge because it looks at prices in the rural and urban areas.
Therefore, with inflation falling and the unemployment rate rising to 4.2%, the Fed may deliver more cuts than expected, boosting silver prices.
The other potential catalyst for silver is that gold price has formed an exciting triangle pattern, which could lead to a strong recovery. Gold and silver often have a close correlation with each other. As such, a gold rally could lead to more silver gains.
Gold could also benefit from some policies proposed by Donald Trump. He has proposed to slash taxes, impose large tariffs, and deport millions, which will require billions of dollars. All these actions are expected to lead to a higher budget deficit at a time when US debt has surged to over $36.2 trillion.
These actions may increase demand for gold, which is often seen as a better alternative to the US dollar. A strong gold price may push silver higher.
SLV ETF stock analysis
The daily chart shows that the SLV ETF stock peaked at $31.7 in October and then plunged. It has moved below the 23.6% and 38.2% Fibonacci Retracement level. The stock has moved below the ascending trendline that connects the lowest levels since February last year.
The stock has moved below the 50-day and 100-day Exponential Moving Averages (EMA). These averages are about to form a bearish crossover, a popular bearish sign in the market.
The SLV ETF’s MACD and the Relative Strength Index (RSI) have continued falling. Therefore, the path of the least resistance for the fund is downwards, with the next point to watch being at $25. In the long-term, however, the fund will likely bounce back, and possibly retest last year’s high of $31.
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