Hopes are being pinned on the clean energy revolution to give silver a fundamental boost that propels the spot price towards $50 or more. Silver stackers everywhere have been disgruntled as inflation and Quantitative Easing measures have increased the money supply and eroded purchasing power in the US dollar, without the price of silver budging out of its sideways range. Now, with more fiscal stimulus and a focus on clean energy, maybe the industrial use of silver will be fully realized.
Commodity Analysis - Silver
About $300 billion of the ‘Build Back Better’ bill's $1.2 trillion price tag will be spent on environmentally sustainable projects. With this funding, cities and states already taking action to prepare for the worst effects of climate change will get a much-needed boost.
There is a possibility that with the new funding electric vehicles will disrupt the automobile market enough to replace heavily polluting internal combustion engines (ICE). The public will become more familiar with clean energy as a normal part of daily life, from school commutes to home power. When more EV charging stations are available, it will be more convenient for people to switch to electric vehicles.
What is the Build Back Better Plan?
The Build Back Better plan is legislation that was proposed by US President Joe Biden ahead of his inauguration. It was conceived to fund COVID-19 relief, boost economic recovery, and invest in new infrastructure. "Build Back Better" includes provisions for childcare, preschool, eldercare, healthcare, prescription drug pricing, and immigration. In addition, it would enhance Biden's pledge to halve greenhouse gas emissions from 2005 levels by 2030, which was made at the U.N. COP26 climate conference in Glasgow.
The plan had been divided into three parts. The American Rescue Plan, a COVID-19 relief package, was signed into law in March 2021. The other two parts were reworked into the current bills over the course of some extensive negotiations. The American Jobs Plan (AJP) was a proposal to rebuild America's infrastructure and create jobs, and the American Families Plan was a proposal to invest in areas related to childcare and education.
Much of the AJP was incorporated into the Infrastructure Investment and Jobs Act, passed by the Senate in August 2021 and by the House last week. Remarkably the Democrats came together to pass a $1 trillion package of highway, broadband, and other infrastructure improvements, sending it to President Biden for his signature on the 6th November.
Democratic leaders still must work on the second part of Biden's domestic program: expanding the social safety net and combating climate change.
According to the nonpartisan Joint Committee on Taxation, social-spending legislation would raise $1.48 trillion in new taxes over the next decade, short of its $1.75 trillion costs. If this remains the case and there is a net transfer of money from the US government to the non-government and this will be a real monetary stimulus and would be a great thing for the US economy.
Can Silver help in the Build Back Better era?
In the wake of global efforts to decarbonize and electrify, expectations are for silver consumption to increase significantly in these 3 areas: The automotive sector and electric vehicles (EV), including the infrastructure needed to supply the power. The solar energy industry and 5G broadband cellular networks.
All three of these issues are addressed by President Biden's Plan for a Clean Energy Revolution and Environmental Justice. https://joebiden.com/climate-plan/
One of President Biden's first policy changes was when he signed an Executive Order (Tackling the Climate Crisis at Home and Abroad) in January 2021 that assigned a target for switching the US government fleet to electric vehicles manufactured in the states.
Approximately a third of the 645,000 vehicles owned by the US government were used by the US Postal Service in 2019 and the company is expected to spend $7 billion on new electric vehicles.
A recent report by The Silver Institute indicates that the automotive industry will use approximately 61 million ounces of silver in 2021.
In the first month of 2021 Tesla shares continued their rise from Bidens wins in November 2020 to close at $793, having spiked as high as $900.40 on the announcement of Bidens Executive Order.
While the amount of silver used in a Tesla and other electric vehicles is small, the aggregate total of all EVs adds up quickly and as we swap from our traditional vehicles to cleaner vehicles the consumption of silver will only go higher.
Silver's electrical properties make it difficult to replace in a wide variety of automotive applications, many of which are crucial to safety and to comply with environmental regulations.
Many car components contain silver, including electronic systems. These components include, but are not limited to, conductive pastes on automotive glass, circuit breakers, fuses, switches, and relays used to activate various electronic devices. In an era of new technologies, silver remains crucial to the auto industry.
Sentiment around silver
Much has been made of the silver squeeze and silver evangelists are very quick to point out that their market has been manipulated by the big bullion banks. Silver and gold bugs also profess that for 1000’s of years the precious metals have been a source of protection against inflation, a store of wealth, has industrial and jewelry applications, and can be used as money. There is a continual new supply coming on to the market so there is an inflationary effect but both silver and gold are relatively small in terms of scarcity. The problem is that now crypto speculators may be taking the limelight and traditional stackers may be tempted to grab a quick 100% return on a Bitcoin rather than wait another decade for the next bull run in the precious metals space.
Sentiment for silver is low for anyone outside of the precious metals space, but everyone is aware that it is the traditional alternative to the US dollar. The fact that these metals have industrial use makes me believe that they reflect a growing economy, as the demand for precious metals increases as the economy requires more electronic goods, and as that happens, consumers are more likely to buy jewelry when they feel they have some spare cash. Demand goes up with an expanding economy, especially when interest rates are low.
The ActivTrades sentiment indicator shows that 82% of traders on the platform are bullish on silver, which is a worry for someone like me looking to initiate a long trade. It is generally a good idea not to follow the crowd, as trades do get overcrowded, and the banks can pull the bids.
When ranges compress the resulting range expansion can be explosive. Currently, the silver price action is all happening within a weekly candle that printed mid-October, and as we have seen the retail traders are all banking on a break to the upside. I would like to agree but I am aware that there could be a significant dip too if the US dollar were to rise sharply or the yields on US Treasuries were to rise sharply. Whilst we are in this range there is little to do but monitor the price action looking for clues.
Something else to consider is that retail traders are looking for an Inverse Head & Shoulders pattern to play out.
If there is a breakout to the upside of the weekly inside ranges, the next pattern to consider would be the extension from the tip of the Inverse Head to the neckline, extending out by x2 and towards $31.50. The problem is a lot of stops would then go below the right shoulder and that could become a target for those looking for a better entry lower.
If the US dollar is falling and, real yields are also falling at the same time as the breakout of the patterns to the upside, there could be a real chance that we start to move towards $50. But until we get to that point, I am going to remain cautious and look for entries at a sweep of what has been marked up as the right shoulder.