Silver Market Update


"Silver is now ready to embark on major upleg."

The outlook for silver has brightened considerably in recent weeks due to its breaking out upside from the tight triangle pattern that had developed through the summer months, although it has yet to break out above its 2008 highs, which is a one crumb of comfort for bears, along with the latest COT figures. Many of the arguments set out in the gold market update are equally applicable to silver, to which readers are referred.

While it is true that silver has not confirmed gold's successive breakouts to new highs, it is also a fact that silver tends to lag gold and to do best towards the end of gold's major uplegs. Thus if gold continues to advance, it is reasonable to expect some fireworks in silver before much longer. Both metals tend to be weak during the summer doldrums period; and, while this year was no exception, they ended the summer—meaning the period to the end of August—looking firm. And, with the seasonally most positive time of year having arrived, both look set to advance strongly soon, provided they are not derailed by the sudden resurgence of deflation. But, as set out in the gold market update, this is now viewed as unlikely with the quantitative-easing (QE) fire hoses already used in recent weeks, standing ready to firefight outbreaks of deflation with instantly created liquidity.

Silver Continuous Contract (EOD) 9/10/10

For the sake of completeness, we will first consider the potential bearish scenario for silver as we did with gold (which would probably only be activated by a sudden resurgence of deflation knocking the stuffing out of commodity and stock markets) now considered unlikely. Up until the end of July, silver looked very vulnerable on the charts with the price retreating beneath its 50-day moving average and both moving averages starting to swing into bearish alignment. It looked a large double top was completing with the highs of 2008; but then, after breaking the pattern of lower lows during the first half of August, silver suddenly and decisively broke out of the symmetrical triangle that had been forming since May in the last week of August.

This bullish development led to a continued advance to the point where silver is now challenging its 2008 highs; however, it has become short-term overbought and so may react first before a successful breakout attempt is made. The last hope for bears is that silver fails to break out to new highs and does form a double top with its highs of 2008 after all and, therefore, goes into retreat from here. The latest COT figures show high, large speculative long positions and high commercial short positions, which suggests it's a possible outcome. Therefore, bears are likely to draw comfort from a near-term reaction, which is very possible due to the short-term overbought condition and COT structure. But as we will now see, this comfort may be misplaced.

Silver 3-Year Chart (9/10/10)

The bullish case for silver at this time is easy to make. The upside breakout from its summer triangle has taken it away from the danger zone and resulted in the rise to its highest level for over two years, so it has now absorbed nearly all overhanging supply around these levels . There was only a short period of trading around the early 2008 highs toward, and at, $21; so, the remaining supply overhang is light. Silver is now in position to break out to new highs and embark on a major upleg, especially as seasonal factors are favorable—September and October are amongst the best months for the precious metals. Also, though silver is overbought short term here, it is not overbought on an intermediate basis as made clear by the MACD indicator on its chart and also by the fact that it's still not far above its moving averages. Thus, after a possible pause or minor reaction, it is likely to continue to advance to new highs, after which the rate of advance is likely to accelerate significantly.

We are as bullish on silver now as we are on gold but are aware of the bearish arguments that are largely related to the deflation risk. It is believed this will be kept at bay by generous helpings of QE and competitive devaluations; hyperinflation being viewed as a better option by those in control, as it buys them more time. That is what the recent strength in the precious metals appears to be telegraphing.

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