Forecast for silver's price for 6 January 2021

2021-01-06

Blue wave calls silver. Forecast as of 06.01.2021Dmitri Demidenko

The Democrats’ victory in Georgia will help silver to head north as the reflation environment will strengthen, and the USD will weaken. But what if a Republican sneaks into the Senate? Let’s discuss it and make a trading plan for [XAGUSD][1]

Monthly fundamental forecast for silver

Twenty-twenty was a bright year for silver. The [XAGUSD’s][1] quotes grew 47% amid pandemic-driven production cuts, strong investment demand, the global industry’s fast recovery, accelerating inflation expectations, and a weak USD. Silver was the best performer in the sector of precious metals. However, it has not exhausted its growth potential yet as old drivers are still in the game.

Metal Focus estimates that silver production fell 6.3% y-o-y to 780 million ounces in 2020. The countries that suffered the most are Peru, China, Mexico, and Argentina. On the contrary, investment demand grew. In the first place, in the USA and Europe.

Production of silver

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Source: Silver Institute.

Investment demand for silver

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Source: Silver Institute.

Silver grows popular amid growing inflation expectations and the world economy’s increasing debts. Ten-year inflation-protected US bonds dropped to their historic low of minus 1.109% since the blue wave started looking more likely. The spread between 10-year Treasury and TIPS yields, known as a breakeven rate, rose to 2.021%. A breakeven rate reflects investors’ expectations concerning average inflation in the next ten years. The level of 2.021% is a peak value last seen in 2018.

The world’s leading countries lavished their economies with fiscal stimuli in 2020, but they will have to pay the bill in 2021, with the debt of $13 trillion (+51% y-o-y) coming due. The biggest payers will be the US ($7.7 trillion), Japan ($2.9 trillion), China ($577 billion), Italy ($433 billion), France ($348 billion), and Germany ($325 billion).

Debt due in 2021

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Source: Bloomberg.

The global economy appears to be doomed to a high debt-to-GDP ratio and new borrowings, which will pay off the old ones. The debt-to-GDP ratio reached the highest value since WWII. Still, the governments are not concerned about that: history says money can be easily borrowed if bond rates do not exceed economic growth rates. According to the World Bank, the global GDP will grow by 4% in 2021. However, as the theory suggests, there’s a moment when money printing and associated inflation become the only alternative to defaults. This circumstance heats interest in precious metals. Another crucial factor is that the Fed does not plan to raise the federal funds rate.

Chicago Fed Chair Charles L. Evans said the Fed was ready to tolerate inflation higher than 2.5% and would even not fear PCE at 3%. This policy contributes to the USD’s weakening and lowers real treasury yield. So, the [XAGUSD][1] bulls feel blessed.

Monthly trading plan for silver

There can be problems if the Democrats lose the Georgia elections: additional fiscal stimuli and reflation environment will look less likely, and silver will be sold on growth to $28.3-28.5 and $29.2-29.5 per ounce. On the contrary, the Blue Wave will help silver update August’s high and return to the value of $30 last seen in February 2013.

Price chart of XAGUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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