Silver is the most volatile of the precious metals. Since 1980, the price has traded as high as just over $50 per ounce and as low as $3.51. The most recent high in silver came in 2011 when the price reached $49.82, a level just shy of the 1980 all-time peak. Since then, the precious commodity declined to a low of $13.635 in late 2015 and rallied to $21.095 in July 20016. Nearby May COMEX silver futures were trading on Tuesday, February 27, at $16.425 per ounce, close to $1 below the midpoint of its trading range over the past three years. Since the start of 2017, the range in silver has narrowed to $15.15 on the lows to $18.655 on the highs. The price is currently around 48 cents below the midpoint of that range on the May futures contract.
As a volatile metal, it is only a matter of time before silver decides to finally break outside of the narrowing trading band which is like a rubber band. When it eventually snaps, it will take the market by surprise, and the move is likely to be fast and furious.
Silver has been in a range
Since silver declined from the highs of $49.82 per ounce in April 2011 to its low at $13.635 in December 2015, the price has been in a range that is a lot tighter than the magnitude of the over $36 drop. In fact, the $7.46 range over the past three and one-half years is almost five times narrower than the decline from the high to the low.
As the monthly chart highlights, silver went to sleep, and we have seen the trading range narrow to around $3.50 since late 2016. Open interest, the total number of open long and short positions on COMEX silver futures has bounced around the 200,000 contract level, while the momentum indicator is in neutral territory on the monthly chart. Given the decline in price variance, monthly historical volatility has dropped to its lowest level in almost two decades at 12.49%.
The dollar is guiding silver lately
The dollar index declined from highs of 103.815 in January 2017 to lows of 88.15 on February 16. While the over 15% drop in the value of the U.S. currency over the past fourteen months did nothing to launch a bull market in silver, over recent sessions silver, along with other precious metals, has been moving higher and lower each day based on converse moves in the dollar index. With little else to watch these days, the precious metals market has adopted the dollar as its traffic cop when it comes to direction on a daily basis.
Silver is a highly volatile commodity, and it tends to have the highest degree of price variance of all of the precious metals. Therefore, silver tends to attract lots of speculative activity in the futures arena. I believe that the wild price volatility and the bull market in the digital currency asset class in 2017, drained some liquidity from silver as speculators tend to go to where the action is in markets. Wide price volatility offers those who trade assets more opportunities to profit and the moves in Bitcoin, Ethereum, and the many other cryptocurrency assets were far more attractive than silver which remained in its narrowing trading range which squeezed trading opportunities.
The technical levels to watch
Eventually, the narrowing trading range in silver will give way on the up or downside. It is possible that we will see a head fake move where the metal moves one way in a prelude to a much more significant move the other. Over history, silver has a habit of violating technical levels before making a substantial move and establishing a price trend which tends to confuse market participants.
As the weekly chart of COMEX silver illustrates, the precious metal made higher lows and lower highs since July 2017. During that month, silver fell to its most recent low at $15.15 per ounce as a flash crash hit the silver market in early Asian trading. The time of the trading day exacerbated the move to the downside as it was caused by a significant sell order during a period of the trading day when there is typically limited liquidity. That bottom stands as critical support for the precious metal with minor technical support at the mid-December 2017 low at $15.555 per ounce, a higher low. On the upside, silver's pattern of lower highs dates back to July 2016 when the price traded at $21.095 per ounce. Silver made a lower high in April 2017 at $18.655, another in September 2017 at $18.16, with the most recent coming in late January at $17.705 per ounce. The most recent high stands as a level that would end the pattern of lower highs over the past almost two years.
Three reasons why the upside will eventually give way
I have been trading in the silver market since the early 1980s which has made me profoundly cynical when it comes to technical levels in the precious metal. I have found, that the most profitable way to approach the silver market is as a contrarian, fading short-term market moves with the goal of catching a significant developing trend. Moreover, the best long-side opportunities in silver, in my experience, have come during periods of price pressure. Meanwhile, the most attractive short-side trades have developed when bullish sentiment in the silver reaches a frenzied peak.
There are currently three reasons why I believe silver will eventually move higher and the price will break the pattern of lower highs. First, the dollar entered a bear market over past months. Since 1985, the dollar index traded in a pattern of seven years of bear market action followed by nine years of a bull market price trend. The bear from 1985-1992 gave was to a bullish trend that lasted until 2001. The next bear market took the dollar to lows in 2008, and the bull market that followed came to an end in early 2017. If we are only beginning the second year of a bear market in the U.S. currency that will last until 2024, the prospects for the price of silver and many other commodities are bullish.
The second reason that I favor buying silver on price weakness is that the world remains a highly uncertain place when it comes to the geopolitical landscape. During times of uncertainty and fear, precious metals tend to attract capital and given silver's penchant for volatility; it is likely that money will once again flow in the silver which will lift the price of the metal.
Finally, silver is a trading sardine. If you are not familiar with that term, I suggest you check out my explanation of the term I like to use for assets like silver. 2017 was the year of the cryptocurrency which drove lots of capital into that asset class. However, the market has curbed its enthusiasm in 2018 as prices have moved lower opening the opportunity for a return of liquidity to the silver market once it breaks out of its current trading range.
Two ways to play for the break higher
When it comes to the silver market, I believe the best vehicle for positioning tends to be the COMEX futures and options market. The contracts on the COMEX division of the CME offers a smooth convergence with physical silver prices because of the ability to make or take delivery of the metal upon expiration of a futures contract. However, most market participants avoid the shark-infested waters of the highly leveraged futures arena. I suggest the unleveraged silver ETF product SLV for medium-term positions in the silver market.
As the chart highlights, SLV was trading at the $15.55 per share level on Friday, March 2 with support at the mid-December low at $14.74 and resistance at the September high at $17.14 per share. When it comes to catching short-term intraday moves in the silver market, USLV is the triple leveraged version of the SLV product.
USLV is only appropriate as a short-term trading vehicle, but it can be highly effective during periods where silver's volatility increases and the price moves higher. USLV has net assets of over $268 million and trades an average of almost three million shares each day.
I believe that the sideways trading in silver will eventually give way to a higher price. I will be approaching the silver market as a contrarian looking to buy and increase long positions during periods of price weakness.
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