Silver Stays Above The Breakout Level - Silver Mining Companies Shine

July 27, 2019

London (July 27)  Silver is a highly speculative metal. Throughout history, both gold and silver had been a means of exchange or currencies. Long before there were dollars, euros, yen, or other currencies that flow around the world financial system, gold and silver were money. Many governments used gold and silver to back their legal tender using gold for banknotes and silver for coinage. As the cost of minting coins with silver rose to make coin worth more than the denomination, mints replaced silver with other, less expensive metals.

Gold continues to play a substantial role in the global financial system. Governments around the world hold gold as part of their foreign currency reserves. Over the past years, they have been net buyers adding to reserves. However, silver has taken a backseat to the yellow metal. As a commodity, the usual tools of analysis often fall short for silver as the significant percentage of annual supply is a byproduct of gold, copper, lead, zinc, and other metal output. Therefore, producers are willing to sell their silver output at any price as the production cost is insignificant.

When gold broke higher in June, silver followed to a far lesser extent. Recently, silver has caught a bid, and the precious metal is now threatening to build on its recent rally. Those companies that are primary producers of silver tend to outperform the price action in the silver futures market during periods when the price is appreciating. The price action in Endeavour Silver Corp (EXK) shares has magnified the price action in the precious metal over the recent weeks.

Silver follows gold higher

Gold broke out to the upside following the June FOMC meeting, but silver only made it to a high at $15.625 on the September futures contract and $15.555 on the continuous futures contract in June. After a dip back under the $15 level in early July, the price of silver took off on the upside.

As the weekly chart shows, it took until the week of July 15 for silver to make a move to a new high for 2019. Silver experienced a delayed reaction compared to gold. Market participants in the silver market likely waited to see if gold held above its breakout level before dipping toes into the silver market on the long side. Price momentum and relative strength continue to rise in overbought territory on the weekly chart as of July 26. Weekly historical volatility has increased from just over 6% in May to almost 18%. Meanwhile, open interest was sitting near an all-time high at 233,589 contracts as of July 25.

The weekly chart shows that the move above the 2019 high at $16.20 to over the $16.50 level broke the pattern of lower highs that had been in place since July 2016.

Silver has a long way to go to catch up based on the 2016 high

From a technical perspective, the move to the upside in the gold futures market has been impressive as the yellow metal rose above the July 2016 peak at $1377.50 and has remained above that level. When it comes to silver, the precious metal has only recently climbed above its 2019 high, and the July 2016 peak remains far above the current price.


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