You probably know that silver prices usually track and follow gold prices but often amplify them during declines.
Silver is both a precious metal used as a value reserve, but it’s also an industrial metal well known for its physical qualities, and used in numerous technical applications. Those two features make silver very attractive not only for industrial players but also for financial investors.
Silver prices are therefore driven by real factors like mining extractions or industrial demand, but also by speculation and other financial factors. Some of them become more significant over the time, depending on the economic and financial context. It appears that the leading factor recently has been the financial deleveraging. Indeed, the massive liquidations of positions from hedge funds which chase cash to face redemptions and therefore reduce drastically their risk exposure have been the key factor of the recent sell-off.
After oil and gold, silver is the third most accessible commodity in the world thanks to numerous financial contracts, futures, ETF’s, options, certificates etc…
The price action posted a low recently in parallel with the low posted by gold prices, in late October. Silver prices touched a low at $US 8.40, and have now bounced back at $US 10.35. It may confirm that the bearish trend started in March 2008 (point A on the chart) is likely to have ended last month (point B). This bearish trend has generated a loss in value of roughly 60% in silver 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. As mentioned in our last update, silver prices have been manipulated in July and August as 2 US banks accumulated massive short positions that created a panic movement on the downside.
Now that the sell-off may be over on the near-term, a further rebound is probable. The technical momentum and MACD indicators signal that some positive trend is building up. In this scenario, the retracement levels of the bear trend occurred this year (between points A and B) may act as targets and resistance levels for the current price action.
The first resistance might be the 23.6% Fibonacci ratio at $US 11.50. However the main target will be the 38.2% ratio (around $US 13.50), which is a more significant level in technical analysis. Furthermore it’s a previous high that the price action already failed to clear in last September.
