SILVER TODAY – Correcting higher but making hard work of it

Otmane El Rhazi from The Bullion Desk.

Short Term: Medium Term: Long Term: Resistances: R1 14.38 Former lows R2 14.65 Former HSL R3 14.85 20 DMA R4 15.62-15.69 Resistance R5 15.68 38.2% Fibo R6 15.87 R7 16.00 Support: S1 14.65 December low S2 14.51 UTL S3 14.38 Early August low S4 13.98 August 26 low S5 13.51 Long term SL Stochastics:Bullish Legend: BB - Bollinger band MACD - Moving average convergence divergence U/DTL - Up/down trend line SL = Support line Technical Comment Analysis Having built a bit of a base around $14.38 in late July/early August, silver rebounded well but this was followed by another stall to fresh lows at $13.98, a level not seen since August 2009 when prices were rebounding off the 2008 low at $8.49. Prices have once again rebounded but are finding resistance around the 20 DMA. Can silver now build on its recent gains? It is trying to do so but lacks staying power – there has been limited follow-through buying after yesterday’s show of strength. It would take a move back above $15 to look less vulnerable. The stochastics have been choppy but remain bullish. The gold/silver ratio was last around 75.80 after a recent high of 79.84, which suggests silver is correcting after becoming oversold. But its rally seems to lack confidence so the market looks both nervous and vulnerable on the downside. Macro view Silver has struggled to keep up with gold – the weakness of late in the gold/silver ratio attests to that – but this may now be being unwound, albeit slowly.  The CFTC commitment of traders position from last week showed 2,735 contracts of short-covering that was slightly countered by 821 contracts of long liquidation. Although the gross short position in silver has fallen significantly after six weeks of short-covering, this has had little impact on the price, which suggests there is plenty of metal available. The shorts are not struggling to cover, which is probably because the longs are also liquidating at the same time. Reports suggest strong demand for silver for jewellery and silverware but the escalation in short selling between June and August seems to have countered the pick-up in physical demand. We also imagine that recent currency weakness in Asian economies has hurt retail demand for silver from both a price perspective as well as well as hitting household spending on luxury items. Conclusion Silver’s plunge to fresh lows recently makes it look even more oversold. ETF holdings remain steady and short-covering has been strong so it seems odd that prices have been as weak as they have. We would have thought that these price levels would start to attract industrial demand; a firmer tone might prompt this. We think prices are well placed to rally back above $15 given strength in other industrial metals. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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