Silver Market Update
Originally published November 7th, 2009.
Whereas gold has forged ahead to new highs in recent weeks, silver has got bogged down working off overhanging supply, which is the price it is paying for having dropped like a rock last year, so that even though it has risen proportionally more than gold this year, it had so much ground to make up that it still hasn't broken out to new highs.
The long-term chart for silver looks chaotic compared to that for gold, not helped by the violent plunge last year which saw it drop from a high near $21 to a mere $8.50 at the low. It has spent this year to date slowly making up the lost ground which has involved it laboriously working its way through the overhanging supply set up by the plunge. The good news is that with the recent break above more concentrated resistance in the $16 area, there is now not that much more resistance to go before it breaks into the clear by advancing above last year's highs, and with gold looking set to continue to make strong gains, a breakout to new highs is probably not very far off.
On the 3-year chart we can see the action last year and this year in more detail. This chart makes clear why silver has gotten bogged down in recent weeks and made no progress - it is because it has run into the price zone where a congestion pattern formed during the first half of last year, and buyers from that time who were seriously rattled by the crash are taking their long awaited chance to "get out even". Once their selling is absorbed - which shouldn't take much longer in a situation of continued gold strength - silver will be free to advance and challenge its highs. It was an achievement for silver to climb above and stay above the important resistance in the $16 area, which should now support the price near-term.
On the 6-month chart the pattern that has formed in silver since early September certainly looks like a Head-and-Shoulders top in the making, with the price now marking out the Right Shoulder high, but it is not thought to be a true one and is expected to be aborted by an upside breakout, although we may first see a reaction back to the support at $16. The latest silver COT chart shows a significant reduction in both Commercial short positions and Large Spec long positions, which is bullish, especially as this occurred after Tuesday's strong gains. A paradox of Technical Analysis is that while the declining oscillators as this pattern has formed are indicative of dwindling momentum that can lead to a breakdown, at the same time they show an unwinding of the earlier overbought condition that renews upside potential. Certainly a break below the support in the $16 area would be viewed as a short-term sell signal, although this is not considered to be likely at this point.
As with gold it is worth taking a look at the silver in euros chart, to see if we can glean any useful hints as to what exactly is going on. The long-term chart for silver in euros is most interesting as it is more clear than the normal dollar chart and removes some of the ambiguity of that chart. The reason for this is that there is a clear and definite zone of strong resistance on the euro chart which has turned the price back no less than five times since early 2006, although it did briefly break through it early in 2008, and silver is struggling to overcome this resistance right now. This resistance level is of such importance that once silver does succeed in breaking above it, it should have little trouble breaking above the lesser resistance at the early 2008 high after which it will be free to advance unfettered by overhanging supply. We should therefore watch this level on the silver in euros chart in coming weeks as the trigger for an acceleration in the rate of advance, a development that is considered to be highly likely given the very positive outlook for gold and the recent high volume breakouts by various silver juniors.