Silver Price Will Move When It Is Good And Ready

August 25, 2019

London (Aug 25)  We have all heard the expression that someone was "born with a silver spoon in their mouth." The saying describes a person with a wealthy background and comes with a connotation that they do not appreciate or deserve the advantage. There are more than a few literary references to the silver spoon dating back to the 1700s. In music, it has also been commonly used since the 1960s. The Beatles song, "She Came In Through The Bathroom Window," featured the lyrics "she came in through the bathroom window/protected by her silver spoon."

Silver had been a sign of wealth and privilege long before its literary and lyrical references. The metal has been around for thousands of years. As far back as 3000 BC, the first Egyptian Pharaoh Menes declared that two and one-half parts silver equal one-part gold. For over 5000 years, silver has been a financial asset along with its counterpart gold.

Silver is a volatile metal, and it has a mind of its own. Over the past four decades, we have witnessed two significant rallies in the silver market that took the price to either side of $50 per ounce in 1980 and 2011. At around $17.40 per ounce, time will tell if silver is ready to move again only eight years after its previous sojourn to the upside. In the meantime, the Velocity Shares 3X Long Silver ETN product (USLV) and its bearish counterpart (DSLV) are leveraged short-term instruments for those who do not venture into the silver futures market on COMEX but are looking for action in the silver market.

Silver is a speculative metal

The price of nearby September COMEX silver futures was trading at just over the $17.40 per ounce level last Friday as the precious metal consolidates after recent gains

As the daily chart highlights, since August 8, the entire range in silver came on August 13 when silver traded to a low at $16.51 and a high at $17.49 per ounce. The 98 cents range was the widest in 2019, and for a long time in the silver futures market. Since then, the range narrowed a bit to $16.82 to $17.465. Silver settled at $17.413 on Friday, August 23. Open interest, the total number of open long and short positions in the futures market declined from 244,169 on August 7 to 235,647 contracts on August 22. Both price momentum and relative strength metrics are holding steady in the lower region of overbought territory as of last Friday. Daily historical volatility at 20.23% is at the highest level of the year.

Silver has a long history as a speculative metal as herds of buyers or sellers drive the price higher or lower. Silver has followed gold to the upside, but the price action has tame compared to the yellow metal, for now.

The monthly chart shows that the trend in silver remains bullish. The next two levels of technical resistance are at the 2018 high at $17.705 and the 2017 peak at $18.655 per ounce. Silver's price action reflects a rounding bottom on the monthly chart, and the metal has posted gains over the past three consecutive months.

Fundamentals are meaningless in the silver market

Supply and demand characteristics in silver are not as significant as in many other commodities markets. While production cost often plays a leading role in establishing price floors, silver is a byproduct of gold, copper, lead, zinc, and other metal output. Therefore, the companies involved in extracting metals from the crust of the earth often treat silver production as an afterthought.

When it comes to the demand side of the equation, requirements for silver in solar panels and technology have more than replaced the use in photography that disappeared decades ago.

As a speculative metal, investment demand is the most significant factor when it comes to the path of least resistance of the price of silver.

The market's sentiment drives the silver bus

Investment demand depends on the market's sentiment. Gold and silver have long histories as money or stores of value and wealth. Gold has rallied in all currency terms. While it remains below all-time highs in dollars, euros, and Swiss francs, the yellow metal has already reached record peaks in yen, British pounds, Australian and Canadian dollars, Chinese yuan, Russian rubles, and most other currencies around the world. Meanwhile, gold is nearing a record level in euros as the record high in 2012 was at just under 1377 and was trading at the 1367 level on August 23.

The relationship between gold and silver has deteriorated over the past decades as central banks around the world hold gold as a foreign exchange asset, but few hold silver these days. However, the bull market in gold continues to have a magnetic impact on the silver market. While silver has underperformed gold on the upside, the price has still rallied with the yellow metal. Perhaps the most bullish factor for the silver market as of August 23 is that gold is at $1525 per ounce is $147.50 or 10.7% above the breakout level at the July 2016 high at $1377.50 per ounce. The resistance over the past years has become technical support.

In July 2016, silver traded to a peak at $21.095 per ounce. At $17.413 on August 23, silver remains $3.682 or over 21% below its critical technical resistance level, which already gave way in gold. Silver has lots of catching up to do if the bull market continues. The market's sentiment is the factor that could eventually drive the silver bus higher for a test of that price. Above $21.095, silver could experience wild upside volatility.

Speculation can lead to manipulation, but only on a short-term basis

In several recent articles, I explained why I believe there is no big hand over the silver market, holding down the price of the precious metal. I do not believe that governments and the leading financial institutions have a desire or reason to depress the price at the current level or anywhere near the all-time peak at just over $50 per ounce.

Market manipulation takes place in all assets, and silver is no exception. Any monkey business with prices occurs on a short-term basis. Spoofing, or putting in substantial orders and canceling them when the price approaches to cause price volatility is unethical and illegal. However, it only causes small and temporary price movements. Pushing markets to technical levels where buy or sell stops sit, is another manipulative practice that is difficult to stop. While the futures market is highly transparent, the more liquid over-the-counter market has far less transparency, making running stops an activity that likely continues. While I acknowledge these manipulative practices, I do not believe financial institutions like JP Morgan, HCBC, and others are colluding with each other or governments in a mass conspiracy to depress the price of silver as some market analysts contend. These banks have massive silver positions in the visible futures market, but they hold contrary positions in the nontransparent physical or OTC forward markets. Therefore, any manipulation is short rather than long term.

Some may argue that lots of short-term manipulation have longer-term effects, but I do not buy that argument as spoofing or running stops amount to pennies in the silver market. After running a 250-million-ounce proprietary long position in the silver market in the mid-1990s, I learned a lot about silver liquidity. When the sentiment is neutral, it is possible to buy or sell massive quantities of the precious metal in a very narrow price range.

Silver is not moving all that much - leveraged products magnify price moves

I continue to be a gold bull and believe that the market sentiment will suddenly shift in silver, and the price will rise and challenge the 2016 high at just over $21 per ounce. Until that occurs, we could see a continuation of higher highs and pullbacks in silver that make trading the optimal short-term approach to the market.

An excellent option for long-term investment in silver is via the physical market for coins and bars. The most direct route for a risk position in the silver market is via the futures or futures options market on the COMEX division of the CME. For those who do not trade futures but wish to own leveraged positions, the Velocity Shares 3X Long Silver ETN product and its bearish counterpart DSLV provide an alternative to futures.

The fund summary for USLV states:

The investment seeks to replicate, net of expenses, three times the S&P GSCI Silver index ER. The index comprises futures contracts on a single commodity. The fluctuations in the values of it are intended generally to correlate with changes in the price of silver in global markets.

USLV has net assets of $278.33 million and trades 353,064 shares on average each day. DSLV, the bearish counterpart, has net assets of $25.64 million and trades an average of 117,784 shares per session. Both products charge an expense ratio of 1.65%.

USLV and DSLV offer market participants triple the short-term price movements in the silver market, and that leverage comes at a price. Both products suffer from time decay, which destroys value over time. Therefore, they are only appropriate for risk positions with very limited time horizons. As an example, on August 19, the price of September silver futures fell to a low at $16.82, and on the following day, they rose to a high at $17.17 per ounce, a rally of 2.08%.


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