By: Greg Holden
After this past week’s surging price of precious metals, traders appear to be expecting some level of retracement in value for silver.
In an earlier article, it was argued that silver prices may outpace the spiking price of gold, which has so far panned out. Gold reached just shy of its all-time nominal high, whereas silver jumped to a 30-year peak and held steady, for the most part.
As of yesterday, however, silver prices appear to be coming back down. So far, it seems, there appear to be two fundamental factors and one technical aspect fueling this retracement.
First, profit-taking among the precious and noble metals yesterday constituted the bulk of the sudden plummet in silver prices. As several industries which apply silver in their production posted above-expected profits in Q4, many analysts seem to be anticipating a pull-back as part of an impending cyclical downturn.
Second, the flaring tensions in Libya, which have driven oil traders bonkers this week, have also created a capital shift towards safe-haven stores of value, like gold. Gold’s upward mobility pulled other associated metals higher along with it, but silver’s spike was given impetus by a multitude of other factors associated with growth among industry and hi-tech.
As long as Libya’s president, Muammar Qaddafi, fights to hold onto power, commodity prices will likely continue to find support. But traders should be cautious since revolutions like those spreading throughout the Middle East may end as abruptly as they began, creating a whiplash turnaround in market activity.
Australia’s central bank governor, Glenn Stevens, warned of such sentiment recently by calling on markets to begin pricing in the impending correction to the latest surge in asset prices. Gov. Stevens’ concern is connected to the fact that Australia’s economy is closely aligned with the value of precious metals and an overextension of investment could create a nasty backlash on the economy Down Under.
The technical factor is, as usual, a theoretical prediction. The daily and weekly charts on silver show what may end up being the first shoulder and the head of a head-and-shoulders formation. If true, we may expect a retracement back towards $27 before a secondary surge, likely reaching as high as $31. If it does end up being such a formation, we may see silver prices breaking out of its uptrend over the next few months, possibly falling back into the low $20s.
Silver - Weekly Chart
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.