Silver Sat At $17 And Then Fell To A Lower Low

December 7, 2019

Summary

  • Sleepy silver puts in a lower low.
  • Open interest drops.
  • Don’t be surprised by lower lows.
  • December can be a funky time in precious metals.
  • The tarnish may come off in early 2020 - SIL tends to magnify the moves in silver on a percentage basis.

Silver can be one of the wildest markets and the most volatile precious metal that trades on the futures exchange. Since 1980, silver has traded as low as $3.505 and as high as $50.36 per ounce. The most recent high came in 2011 when silver stopped just short of its all-time peak and reached $49.82.

Silver is a schizophrenic metal, while the price action can be explosive or implosive at times, it can also spend long periods in a volatility coma where the price hardly moves.

2019 has been a good year for the silver market. After falling to a low at $14.245 in late May, the price took off to the upside, reaching a peak at $19.54 on the continuous COMEX futures contract in early September. While gold experienced a technical breakout above its July 2016 high, silver fell short of a challenge of that level at $21.095 per ounce. At the $16.65 level on the nearby COMEX futures contract on December 6, silver was sitting a bit below its midpoint for 2019, and the price action had been less than exciting over the recent weeks. $17 had become a pivot point for the silver market. Meanwhile, we could see a return of bullish price action in 2020 when silver wakes up from its current correction.

The Global X Silver Miners ETF product (SIL) tends to magnify percentage moves in the silver market.

Sleepy silver puts in a lower low

After reaching a high at $19.87 per ounce on the now active month March COMEX futures contract on September 4, silver has made a series of lower highs and lower lows.

Source: CQG

The daily chart highlights that silver had been in a sideways trading pattern between $16.76 and $17.355 on the March contract since November 8. For almost one month, silver traded around the $17 pivot point in a sleepy range, but last Friday the price broke through the bottom end of the band.

Open interest drops

Open interest is the total number of open long and short positions in a futures market. Silver is a metal that moves on speculative interest and the market's sentiment. The open interest metric is a measure or barometer of market participation in the futures arena.

Source: CQG

The chart illustrates that open interest fell from 223,779 contracts on November 22 to 204,953 contracts as of December 5. The metric fell as December futures rolled to March on the COMEX division of the CME. The sideways trading pattern likely caused some market participants to liquidate rather than roll risk positions in the silver market.

Meanwhile, price momentum and relative strength indicators were falling towards oversold readings on December 6. Daily historical volatility at 19.14% rose as the silver futures market fell to a lower low.

Don't be surprised by lower lows

The pattern of lower lows in the silver market since early September created short-term support levels at $16.76 on March futures and $16.615 per ounce on the continuous futures contract. Last Friday, the price broke below those levels. Meanwhile, critical technical support for silver stands at the 2019 low at $14.245 and the December 2015 bottom at $13.635 per ounce. Therefore, we could see silver drift or spike even lower before the end of this year.

I remain bullish on the prospects for the silver market and believe that any move to the downside would create a higher low. I view any price weakness over the coming weeks as a buying opportunity. The end of the year can be a time when the price of silver drifts to the downside.

December can be a funky time in precious metals

In December 2015, the price of silver fell to a low at $13.635 per ounce, which was the lowest level since 2009. That year, gold also fell to a low at $1046.20 per ounce. Gold and silver have not returned to those levels.

Source: CQG

2018 turned out to be a special case in the silver and gold markets as the selling in equities caused a flight to quality that supported both of the precious metals. The monthly chart shows that from 2013 through 2017, silver experienced selling pressure during the final month of each year. In 2014 and 2015, the low in December was the bottom for each year.

Short-term technical support for the silver market in at the $16.615 per ounce gave way last Friday. A lower low this month would not come as a surprise given the seasonal price pattern in the silver market. In many of the previous years, selling in December led to gains in January.

The tarnish may come off in early 2020 - SIL tends to magnify the moves in silver on a percentage basis

The price of gold broke out to the upside in 2019 above its long-term technical resistance level at $1377.50 per ounce. While the price action in the silver did not lead to a long-term technical break to the upside, silver was appreciably higher on December 3 than at the end of 2018. All of the factors that have pushed the prices of gold and silver higher this year remain in place. Some could intensify in 2020.

Global interest rates have declined and are not likely to rise anytime soon. Gold and silver compete with fixed-income instruments for investment flows. The current level of rates around the world is a supportive factor for investment demand in the gold and silver markets.

The trade war with China continues as the prospects for a "phase one" deal have dimmed. The status quo or an escalation of the trade war would cause increased fear and uncertainty in markets across all asset classes, leading to increased demand for safe-haven assets like gold and silver. Moreover, the wave of protectionism spread to South America last week as President Trump slapped tariffs on steel and aluminum on Brazil and Argentina.

Iran remains a clear and present danger in the Middle East. North Korea is test-firing missiles again. Anti-Chinese government protests in Hong Kong have intensified. The divorce between the UK and the EU has not occurred. And, the US faces what could be the most contentious Presidential election in history in 2020 with President Trump facing impeachment and progressive Democrats seeking to alter US policy on many fronts.

As we head into 2020, the political and economic landscapes in the world as filled with potential landmines that could cause periods of fear and uncertainty to grip markets. Gold and silver tend to thrive during periods where market participants seek the safety of assets that hold value.

If 2020 is going to be another bullish year for gold and silver, shares of mining companies that extract the metals from the crust of the earth are likely to outperform the metals. The top holdings of the Global X Silver Miners ETF product include:

Source: Yahoo Finance

SIL has net assets of $510.36 million, trades an average of 199,712 shares each day, and charges an expense ratio of 0.65%. The price of silver rose from $14.245 in late May to a high at $19.54 per ounce in early September, a rise of 37.2%.

Source: Barchart

Over the same period, SIL moved from $21.91 to $32.26 per share or 47.2% as the ETF outperformed the price action in the silver futures market. If silver moves above its July 2016 high at $21.095 per ounce in 2020, the percentage advantage of the mining ETF could be even more significant.

Silver had been trading around the $17 per ounce level over the past month, and the price action had been a real snoozer. Any price weakness like we witnessed last Friday over the coming weeks could be a holiday gift for the bulls for 2020.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

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Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER.com. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.

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