After hitting a 1-year high, will silver continue to surge?

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July 25, 2019 10:56am NYSE:GDX NYSE:GDXJ

NYSE:GDX | News, Ratings, and Charts

From Andrew Hecht

  • Silver finally makes a new high for the year
  • The move ends a pattern of lower highs
  • Silver is a volatile market- Risk-reward favors the upside, but it could be a bumpy ride

The market’s sentiment drives the price of silver more than most other commodities because the cost of production does not matter much. While there is some primary production of the precious metal, the majority of silver output comes from the production of other metals and ores. Therefore, many producers will sell at any price. As long as gold, copper, lead, zinc, and other metals remain above production cost, silver will flow into the market.

Silver has a long history as a speculative metal. When the price of silver begins to move, the percentage gains or losses can be significant. Following the June Fed meeting, the price of gold broke out to the upside out of the $331.30 range that had contained the price of the yellow metal since 2014. Gold rose above its 2016 post-Brexit high at $1377.50 and has been trading north of the $1400 level. Silver followed, but in June and until mid-July, it could not even make it to the 2019 peak price. The iShares Silver Trust (SLV) is the most liquid silver ETF product with $4.92 billion in net assets.

Silver finally makes a new high for the year

Last week, the price of silver finally took off on the upside.

The weekly chart highlights that silver rose to a new high for 2019, reaching $16.505 per ounce and settling at around the $16.20 level on July 19. Price momentum and relative strength indicators are rising. And, total number of open long and short positions in the COMEX futures market has moved higher with the price of the metal. Increasing open interest and appreciating price is typically a technical validation of an emerging bullish trend in a futures market. The price action caused weekly historical volatility to rise from just over 6% in early May to almost the 20% level at the end of last week.

The move ends a pattern of lower highs

At the same time, the price of silver moved above the $16.20 technical resistance level from the beginning of 2019. The futures market had been making lower highs since the 2016 at $21.095, and last week’s price action was the first time that silver moved above a significant area of technical resistance. The bearish price trend that had been firmly in place over the past three years came to an end last week.

Above the July 19 high at $16.505 on the continuous contract and $16.625 on the September futures contract, the next level on the upside stands at the 2018 high at $17.705. Above there, the 2017 peak at $18.655 stands as technical resistance. If silver is entering a bull market, the ultimate goal on the upside is the 2016 high at $21.095 per ounce. Gold has already conquered its technical target from that year.

Silver is a volatile market- Risk-reward favors the upside, but it could be a bumpy ride

The technical price action in the silver market over the past three years created a series of hurdles on the upside. Therefore, a bull market in silver could be a bumpy ride.

Historically, silver tends to move higher and lower with the price of gold. The price relationship dates back thousands of years. Silver remains historically cheap compared to the price of gold. Meanwhile, last week’s rally caused the silver-gold ratio to decline from 93.7 ounces of silver value in each ounce of gold value to just over the 88 level. The modern-day average for the ratio dating back to the 1970s stands at around 55 ounces of silver to each ounce of gold. In 2011 when gold and silver hit highs, it took only 32.3 ounces of silver to purchase an ounce of gold. A return to the long-term average level in the ratio would put the price of silver at $26 with gold at $1430 per ounce. At $16.20 on July 19, silver could have lots of upside at its current level if the break higher leads to more gains.

The risk-reward of a long position in the silver market is attractive now that the price of silver proved itself by climbing above a level of technical resistance. Risking $1 on the downside for the potential of a $10 gain seems like a pretty good bet in the current environment

The iShares Silver Trust (SLV) was trading at $15.42 per share on Thursday morning, down $0.10 (-0.64%). Year-to-date, SLV has declined -3.56%, versus a 13.07% rise in the benchmark S&P 500 index during the same period.

SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #9 of 33 ETFs in the Precious Metals ETFs category.

This article is brought to you courtesy of

About the Author: Andrew Hecht

andrew-hechtAndrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.

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