Silver Tries To Make A Move

| About: VelocityShares 3x (USLV)

Summary

Silver only made a marginal new low for the year.

Higher price and higher open interest.

The ratio falls as silver outperforms gold.

Four levels of technical resistance.

If silver is heading higher, USLV offers big returns.

Silver is the most speculative of all precious metals as memories of rallies to over $50 on 1980, and $49.82 per ounce in 2011 continue to linger in the minds of trend-followers and other market participants. In late 2001, the price of the precious metal fell to lows of $4.015 on the nearby COMEX silver futures contract. Ten years late, the price appreciation amounted to more than a ten-bagger for those with the foresight to buy at or close to the lows and hold the metal for a decade. There was little or no pressure for those investors or traders from 2001 through 2011, as the price never returned to the 2001 bottom. In fact, since the high in 2011, silver has only managed a move down to a low of $13.635 in late 2015 and was trading at just under the $17 level on Monday, June 11.

Few commodities offer both liquidity and significant volatility which makes silver a metal that stands in the limelight at times. Even though the silver futures market has been making lower highs since it trades at just over $21 per ounce in July 2016, there are signs of strength in the market over recent months.

Silver only made a marginal new low for the year

On May 15, gold which is the leader of the pack in the precious metals sector because of its liquidity and position as a financial asset with central banks holding the yellow metal as part of their foreign exchange reserves fell to a new low for the year. In 2016 and 2017 the yellow metal made lows during the first days of the year and never challenged their bottoms for the year. However, 2018 is a different story and in mid-May gold fell to lows of $1281.20 per ounce on the nearby futures contract after not violating the $1300 level during the year.

Source: CQG

As the weekly chart of COMEX gold highlights, the yellow metal made a new low for the year in May and had since bounced to the $1300 level in lethargic trading. Gold declined by over $20 below its early February bottom for the year.

Source: CQG

As the weekly silver chart illustrates, the price of the precious metal fell to lows of $16 in early May, which was only a few pennies below the March bottom. Silver did not follow gold lower has been outperforming the yellow metal over recent weeks in a sign of strength.

Higher price and higher open interest

From a technical perspective, silver's performance has been impressive since May 1 when the July futures contract fell to a low of $16.07 per ounce.

Source: CQG

As the daily chart shows, silver has made higher lows and higher highs over the past six weeks rising to just under the $17 per ounce level. Open interest, the total number of open long and short positions in the COMEX silver futures market has risen to 230,413 contracts as of June 8, which is tending towards the all-time high in the metric at 243,411 contracts on April 6. At the same time, price momentum is moving higher along with the relative strength index. These metrics remain in neutral territory but are leaning higher and waiting for a confirmation from the price that could spark more technical buying in the silver futures market. When it comes to open interest, a rise in price together with an increase in the metric is typically a technical validation of a bullish price trend.

The ratio falls as silver outperforms gold

Silver's price action over recent weeks has been impressive when compared to gold.

Source: CQG

As the weekly chart of the price of COMEX gold divided by the price of COMEX silver futures shows, the ratio between the two metals had been making higher lows and higher highs since mid-2016. However, after reaching a high of 81.70 in mid-March of this year, it has turned lower and was below the 77 level for the first time since January and appears to be heading for a new low on the year. The long-term, four-decade average for the price relationship between silver and gold is around the 55:1 level which means that silver has been historically cheap compared to the price of the yellow metal. When the ratio declines, it tends to signal strength in the precious metals sector. The last time the ratio was below its long-term average was back in back in 2013. When gold reached the $1920 level and silver was at its peak of $49.82 in 2011, the ratio reached a low of just under 33:1. The recent trend reversal in the silver-gold ratio could be a positive sign for the precious metals sector as silver, the more volatile metal, has been outperforming the price action in gold.

Four levels of technical resistance

As silver is just below the $17 level on June 11, there are four technical milestones on the upside that stand as resistance for the price of the precious metal.

Source: CQG

As the weekly chart highlights, the first level stands at $17.36, the mid-April high. Above there, $17.705 per ounce is the next level which is the 2018 peak price for silver. Silver traded to $18.18 in September 2017 and at $18.655 in April 2017 which could be a gateway to a challenge of the July 2016 high at $21.095 per ounce. The trading range in silver has narrow dramatically in each of the three previous years, which could be a sign that the price consolidation will give way to a significant move. Given the recent price action, it appears that the odds favor a break to the upside when silver is ready to make its move.

If silver is heading higher, USLV offers big returns

USLV is the triple-leveraged silver ETN product.

Source: CQG

USLV was trading around the $10.73 per share level on June 11. With a market cap of $293.11 million and average daily trading volume of over three million shares, USLV offers excellent liquidity for those who do not venture into the silver futures arena.

Silver is showing signs that it could be ready to move after three years of a narrowing price range. $17 is a critical psychological level for the precious metal, but $17.36 is a line in the sand that could encourage trend following longs back into the silver market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.