Silver is the most volatile precious metal as it tends to move the most on a percentage basis when it trends. Meanwhile, silver can also offer significant percentage moves when moving in a range. In 2023, nearby silver futures have been as low as $19.83 and as high as $26.20 per ounce. At the $23.174 level on September 8, the active month December COMEX futures contract is just above the trading band’s midpoint. Over the past months, buying on dips and selling on rallies has been the optimal approach to silver. I remain bullish on the metal’s prospects and maintain a core long silver position. As I wrote on Barchart on August 23, “The Case for Rising Silver Prices Remain Compelling.” However, even the most compelling markets rarely move in straight lines, and trading silver over the past months lowers the cost of long positions while I wait for capital appreciation.
A choppy trading range in silver
Buying dips and selling rallies has been the optimal approach to the silver market in 2023.
The chart of the active month December COMEX silver futures contract shows that 2023 began with sideways trading around the $25 per ounce level, leading to a selloff that took December silver futures below the $21 level. On March 8, silver reached a bottom that ignited a rally to just below $27, where it ran out of upside steam. Silver fell below $23 in late June when it turned higher and climbed to a lower high at over the $25.80 level in late July. Silver has made lower highs and lower lows since the late July high and was trading around the $23.20 level on September 8.
The choppy trading range made selling rallies and buying dips the optimal approach since the end of 2022.
The dollar index and bonds have weighed on silver
Over the past weeks, falling bonds and a rising dollar index have been bearish for silver prices.
The U.S. 30-year Treasury bond futures chart illustrates the pattern of lower highs and lower lows since late June. Higher interest rates increase the cost of carrying silver and other commodities. Moreover, higher rates make fixed-income assets more attractive investments, and capital tends to flow from stocks, commodities, and other asset classes to bonds as rates increase. Rising rates also boost the U.S. dollar’s value against other currencies.
The U.S. dollar index chart shows the bullish trend that took the index from below 100 in mid-July to the 105 level on September 8. The dollar is the pricing mechanism for most commodities, and silver is no exception. Silver becomes more expensive in other commodities when the dollar rises, causing the global demand to decline. Therefore, a rise in the U.S. currency tends to be bearish for silver and other raw material prices.
The potential shocks that could lift silver above the top end of its trading range
Unexpected events cause the most extreme moves in markets across all asset classes. Some of the issues that could cause a sudden rally in silver are:
- A correction in the dollar that takes the dollar index back to the mid-July lows.
- A bond rally when the Fed pauses its hawkish monetary policy path.
- Geopolitical surprises in Ukraine, Russia, Taiwan, or other areas where tensions are high.
- Progress on a BRICS currency with gold backing that takes gold to new highs.
- Significant sales of U.S. government treasury securities by China that lift interest rates because of geopolitical tensions.
- Credit downgrades for U.S. debt because of the rising national debt level.
These and other unforeseen events could cause a herd of buyers to descend on the silver market and lift prices. Meanwhile, the choppy trading conditions in 2023 suggest that silver is close to a low at the $23.20 level on September 8.
Silver mining shares offer value
In the August 23 Barchart article, I highlighted the diversified senior silver mining ETF (SIL) at $25.93 and the diversified junior mining ETF (SILJ) at $9.52 per share. The ETFs have declined with silver over the past weeks. December silver futures fell 6.4% from $24.75 on August 23 to the $23.174 level on September 8.
The chart shows the 4.4% drop in SIL since the August 23 $26.14 high.
SILJ dropped 5.6% from the August 23 $9.51 high to $8.98 on September 8.
While the mining shares often underperform silver on a percentage basis during bearish periods, SIL and SILJ have experienced smaller percentage losses than December silver futures since August 23, which could be a bullish sign for the metal.
Trade silver with a small core investment position
I am long silver, as I hold a physical position. I believe silver will eventually surprise on the upside. However, the choppy trading environment has made trading a better strategy than just holding the metal. I maintain my core position but will continue to buy dips, adding to the length, and sell on rallies to reduce the exposure. However, the core position will remain intact. I would consider adding to the core position below the $20 per ounce level, but silver has not been under $20 since March 2023, when the price briefly eclipsed the level and found a bottom at $19.83 per ounce. I would be surprised if silver ventures under $20 again in 2023.
Trading and investing involve different skills and disciplines. Combining trading with investing has enhanced results in 2023, and I expect that to continue. At $23.174 on September 8, silver was 2.8% lower than the continuous $23.862 contract price at the end of 2022. Successful range trading can turn a small loss into a gain while waiting for silver to finally break out to the upside.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
