Price action in silver was strong in May, with the price rallying by 23%, from $26.4 per ounce (30th April) to its peak at $32.5 per ounce (on 21st of May). Since then, though, momentum has reversed. In particular, silver has made lower lows and lower highs (albeit in a relatively ordered fashion). With that, silver is now testing a key level at its 50 day moving average (fig 1a).
The question, therefore, is: Will silver build a base at around that key support level, and rally in coming weeks and months? Or – will it first test its 90 or 200-day moving average, before rallying? Or indeed, is the longer term trend down?
The bears, in that respect, point to: (i) the uptrend in the US dollar (which appears to be ongoing); (ii) high levels of net LONG positioning (80.7k contracts, highlighting fuel for further weakness in silver prices, see fig 1); (iii) SELL signals from certain technical models (suggesting that silver remains over-bought); and (iv) bullish sentiment (a contrarian SELL signal, fig 1c). Summarising many of those inputs, our market timing model for silver is close to its SELL threshold (see fig 1b).
The near term risk, therefore, is that silver prices continue to trend down. On a longer time horizon, though, US liquidity remains the driver of the silver price. Fed loosening, in that respect, is becoming increasingly likely (as highlighted in our most recent Monthly Asset Allocation report). That should, at some stage, put a floor under the silver price. An opportunity to buy the dip in silver is therefore likely in coming weeks, if not months.
Fig 1: Speculative net positioning in silver futures vs. silver price (USD/oz)
Fig 1a: Silver candlestick futures, shown with 50, 90 & 200 day moving averages
Fig 1b: Silver market timing model vs. silver price (USD/oz)
Fig 1c: Silver CONSENSUS sentiment vs. silver price (USD/oz)
