Silver prices usually track and follow gold prices but often amplify them during declines. This is what happened recently during the sell-off on commodities markets. On July 15 silver closing price was $US19.12 an ounce. Last Friday, it closed at $US11.32. It’s a 41% decline in 2 months and a half, much more important than the pull back on gold prices.
The chart shows the strong positive correlation between gold (red line) and silver prices (black bars). Since the beginning of 2008, this correlation was almost perfect. However, since mid-August, silver prices have been failing to keep up the pace and are much more “heavy” than gold prices. What is going on?
It’s likely that silver prices have been manipulated as they have been extremely oversold by 2 banks during August. The monthly Commitment of Traders (COT) report of the Comex is a document that tracks all the long and short positions held by large and small speculators, and by commercial, with the number of contracts opened week by week.
It appears that in July and early August, 2 US banks have massively increased (+547%, more than 6 times) their short positions on the silver market, for a total amount of 2.7 billion US Dollars. This is huge. This extreme dominating position (the 2 institutions were holding 61% of the short positions) has generated a panic movement which has driven prices downward very quickly.
More recently, the key factor of the sell-off is the massive liquidations of positions from hedge funds which chase cash as they deleverage and reduce drastically their risk exposure.
As a result the price action cleared the important support level that was backing the upside trend since August 2007 when prices fell below $US17 in early August.
The level of $US12.50 was another intermediary support which has been eventually cleared too on September 8. The price action bottomed at $US10.31, has bounced back sharply and has been falling back for two weeks now. The MACD and Momentum technical indicators trigger new bearish signals.
That’s why a pull back towards the recent low of August is likely. A potential double bottom on this support might be possible but anyway the upside is quite limited on the near-term. The recent rebound failed to break above the 38.2% retracement ratio of the 8-weeks decline (between points A and B on the chart). This resistance (around $US14) should be difficult to clear.
Indeed, many small players have been caught by the panic occurred in August and did not have time to close their long positions. Therefore they close their positions as soon as a rebound drives the price a to a significant resistance level. The coming weeks should be therefore a consolidation phase with potential rangy market between $US10.30 and $US 14.
Good Investing,
Gabriel
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