Silver can be considered a hybrid market, part precious metal and part industrial metal.
Both technical and fundamental analysis of the silver market result in a bearish conclusion.
Long-term investment traders continue to hold a net-long futures position leaving silver open to increased pressure from long liquidation.
The silver market is interesting. It can be considered a hybrid market, part precious metal (with gold) and part industrial metal (with copper). In this way, it reminds me of May winter wheat contracts, Chicago (SRW) and Kansas City (HRW), that tend to straddle the line between old-crop and new-crop fundamentals. Given this, silver (as well as May winter wheat) also shows characteristics of middle child syndrome, getting lost in the attention paid to King Gold (one of the 3 Kings of Commodities) and Dr. Copper (an honorary degree for its use as an economic indicator). The only thing Silver is known for is being the Lone Ranger's horse (though you have to be of a certain age to get that reference).
From a technical point of view, March silver (SIH25) remains in an intermediate-term downtrend on its weekly chart after extending the move to a low of $29.145 during Thursday’s meltdown. Overnight through early Friday morning saw the contract hold above yesterday’s mark, though not by much. Given weekly stochastics remain above the oversold level of 20%, there still looks to be time and space for Silver to gallop lower.
If we expand our view to long-term, using the Silver Cash Index (SIY00) monthly chart, we see a major downtrend just beginning to gather momentum. Heading into December the key price was the previous 4-month low of $26.5293 from August. With the Index priced near $28.9150 heading into Friday’s session, it’s unlikely, but not impossible, the previous 4-month low moves up to $27.7553 (from September) once the calendar page turns to January.
Why the focus on previous 4-month lows (and highs)? I learned to use this as a momentum indicator based on a longer-term adjustment to the Four-Week Rule discussed in John J. Murphy’s book, “Technical Analysis of the Futures Market”[i]. This is one of the few technical analysis momentum indicators I continue to track.
Like many markets, silver faces a murky fundamental future. As a precious metal, if the US dollar index continues to firm on the idea inflation is likely to heat up due to increased tariffs and trade wars, silver could extend the major downtrend on the Indexes' monthly chart. From an industrial metal point of view, the new administration’s promise to step off the path of green energy could hurt demand for silver in a number of products, including solar panels.
Lastly, long-term investors continue to hold a net-long futures position, though this has been decreasing of late (the next CFTC Commitments of Traders report is set for release Friday afternoon). Silver is vulnerable to increased pressure if an extended period of long-liquidation is seen.
[i] 1986 edition, pages 268-274
