Silver Market Update
Originally published August 17th, 2009.
In the last update we had defined silver's overall trend as neutral, with it being rangebound between clearly defined and significant zones of support and resistance, and thus a trading sell towards the top of the range, i.e. on an approach to the $16 area, and a trading buy towards the bottom of it, in the $12 area. Since that update silver has regrouped and made another run at the resistance, but got no further than $15.20. However, over the past week the COT structure for silver, which was already deteriorating as we had earlier observed, has continued to worsen to the point that it has become bearish, at least over the short-term.
On the 3-year chart we can see how the failure of the uptrend in force from last November shifted the intermediate trend from up to neutral, with the latest now bearish COT picture increasing the risk of silver dropping back to the support in the $12 area, which would not alter the intermediate trend from its current neutral status.
The long-term chart for silver is most interesting as it shows that while silver has outperformed gold on the rally from the lows late last year, overall it has underperformed gold over the course of the bullmarket this decade. The savage plunge last year breached the long-term uptrend and was a warning, signaling as it did a change of major trend from up to neutral, meaning that a giant top could be forming. Thus, we will treat the overall trend as neutral whilst the price remains between the major support and resistance levels shown. This chart makes clear that a break of the relatively close support level in the $12 area would be a serious development that would open up the risk of a drop back towards the lower support in the $8 area, where silver would of course be a trading buy again.
Whilst silver is classified as a Precious Metal, industrial demand for it is a much greater determinant of its price than is the case with gold. This is why it got smashed last year - and why it is once again vulnerable. As pointed out in the Gold Market update, silver lease rates have fallen back close to zero and warehouse levels of base metals are at extremely high levels, which indicate hoarding by speculators rather than a pickup in industrial demand, which is bearish. For these reasons should the broad stockmarket crater again, silver could be hit hard.