The spot price of silver closed Friday at $16.285 an ounce, down from $16.54 going into Thanksgiving.
Investors move out of precious metal investments and back to more traditional assets as the dollar rises.
The U.S. dollar has gained strength as massive money printing around the globe has hit foreign currencies – specifically the euro and the yen.
The Bank of Japan announced Oct. 31 it will up annual bond-buying by 10 trillion yen ($82.8 billion). And while European Central Bank President Mario Draghi hasn’t confirmed an ECB quantitative easing to reverse Eurozone disinflation, the calls for it are louder. Sooner or later, Draghi will give in and QE will become a reality in Europe as well.
Now there’s a lot of downward pressure on the euro and the yen as short sellers look to profit off these currencies’ downfalls. This pushes up the dollar even more.
The strong U.S. dollar is now silver’s biggest headwind. This comes just as bearish sentiment has retreated a bit in the futures market…
Short Covering Fails to Propel Silver
In late October, speculators held a record high number of short positions – 51,771 short contracts representing 258.6 million ounces of silver. Speculators have shed 22,781 contracts, or about 114 million ounces.
Short-side speculation has obviously fallen somewhat significantly. But silver prices haven’t really been able to break through new short-term resistance levels around $16.67, established in late November.
At the moment it looks as if bearish sentiment is waning, but the dollar’s strength has kept silver from making the big speculator-induced gains silver saw this summer. Silver rose almost 14% from summer lows when short sellers exited the market en masse from early June to mid-July.
This hasn’t happened in this latest round of short covering.
Silver prices are up 6.3% since touching off October lows of $15.315, but there’s been no breakout. After establishing support at those lows, and resistance at $16.67, prices have bounced around.
And this is the probable outlook for silver prices, at least in the near-term.
This current round of short covering will likely do just enough to keep silver from falling below support levels. But the dollar’s strength will also keep prices from punching though resistance. Silver is likely to range-trade and go sideways for a while, at least while bearish speculators retreat.
In order for a silver price rally, the dollar will have to retreat more significantly from the seven-year highs it’s been pushing.
This will be difficult on a shorter horizon. The yen and the euro are oversold and testing historic support levels. They could experience a snapback that weakens the dollar and boosts silver.
But before that, the yen and euro have more to fall. Especially as the bears pile in on the sell-side trade in hopes to pocket gains ahead of a QE-induced devaluation.
Inflation will likely not take hold, at least not to the effect Japan and Europe want. Demand is way too weak. And pumping funds into banks that are likely to go unborrowed as consumers and businesses pay down debt is not going to spark inflation.
But it will take a couple more economic reports to reveal that. Until the market catches wind, we’re going to see the euro and yen continue to fall.
Bottom Line: Bearish speculation is subsiding in the silver futures market. But the dollar’s strength is such that even a mass short covering won’t cause a silver price breakout. The euro and yen will keep falling, so the short-term prospects for silver are subdued. However, silver is better when employed as a long-term hedge against negative market movements, and you’d be wise to build these holdings while silver is still cheap.
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