Silver Is Stuck In Neutral

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About: VelocityShares 3x Long Silver ETN (USLV), Includes: AAAU, AGQ, BAR, CEF, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GHS, GLD, GLDI, GLDM, GLDW, GLL, GLTR, IAU, IAUF, JJP, OUNZ, PALL, PGM, PHYS, PLTM, PPLT, PSLV, PTM, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, SPPP, UBG, UGL, UGLD, USV, ZSL
by: Andrew Hecht

Summary

Looking ugly below $14.00.

Looking great over $14.90.

A speculative metal in hibernation.

Silver is not following gold.

USLV and DSLV can provide explosive short-term returns.

The silver market is stuck in a rut. Even though gold broke above its short-term technical resistance, silver has not moved to a level that is outside of its trading range since trading down to the lowest level at $13.91 in mid-September. Silver is trading at a twenty-five year low against gold which typically occurs when the prices of both metals are experiencing bear market conditions.

The last time silver traded to its current level compared to gold was in 1993. During that year gold traded in a range from $325.80 to $409.00 per ounce, one-third of its current price level. During that year, silver hit a low at $3.51, and the high was $5.47 per ounce.

Things are very different these days with gold at the $1225 level and silver trading at $14.42 but the level of the price relationship stands as a warning so long as the silver market continues to hibernate.

Silver tends to be a highly volatile precious metal that experiences much higher percentage gains and losses than gold when prices are moving. Silver's volatility is typically 50% higher than gold's, but these days, the price of silver is trading between $14 and $15 per ounce without any indication that it is ready to break out of the trading band. Silver tends to move when market participants least expect it to conquer critical technical levels on the up or downside. Therefore, it is possible that the current period of hibernation is a prelude to a significant move in the price of the precious metal. If we are on the verge of a substantial break to the up or downside in the silver market, the triple leveraged Velocity Shares 3X Long Silver ETN product (USLV) and its complementary product (DSLV) could turbocharge returns when the price of the precious metal decides to break out of its current trading range.

Looking ugly below $14.00

Silver has been making lower highs, and lower lows since the precious metal hit its highest price since July 2014 at $21.095 two years later in July 2016.

Source: CQG

As the weekly chart highlights, the first significant lower high in the silver market came in April 2017 at $18.655 per ounce. In September 2017 the precious metal rose to a lower peak at $18.16.

This year, an attempt at a January rally ran out of upside steam at $17.705, and in mid-April, silver could only reach the $17.36 level on the nearby COMEX futures contract. The latest lower high came in mid-June when silver managed to rally to just one cent under the April peak, and the failure to move above $17.35 caused a cascade of selling in the silver market which fell to a low of $13.91 in mid-September, the lowest level for the metal since early 2016.

Silver looks particularly ugly below the $14 per ounce level as critical technical support for the precious metal stands at the December 2015 bottom at $13.635 per ounce. Each time silver moved towards the $14 level, the threat of a break of the long-term support sends chills up the spines of the silver bulls and provides thrills for the bears who are licking their chops at the prospect of an elevator ride to the downside in the volatile silver market. Meanwhile, the weekly chart highlights that the momentum in the silver market shifted high after its failure to drop and remain below the $14 per ounce level.

Looking great over $14.90

Silver dropped to its low in mid-September and bounced reaching a high of $14.95 on the December futures contract on October 2.

Source: CQG

As the daily chart shows, the first attempt to move above the $15 per ounce level in early October failed at $14.95 which sent the price back to a low of $14.255 on October 10. Silver then rallied to a lower high at $14.88 on October 16 when selling took the price back to lows at $14.24 on October 31 which was the day that the dollar index traded to a new high at 96.98 on the December futures contract. In mid-August when the dollar index hit its previous high, silver traded to a low of $14.405 and kept on going on the downside falling to $13.91 in mid-September. However, gold did not go for the bearish ride with silver as the price of the yellow metal recovered from lows at just over the $1160 level to above $1200 and was trading at over $1213 when the dollar hit its most recent peak on October 31. Meanwhile, silver rallied on the first day of November reaching a high at $14.92 on November 2 before selling took the price back down to the $14.40 level on November 8 as the dollar index moved back over the 96 level.

Silver looks great at over $14.90 and lousy as it moves towards $14.00, but since the September 11 low, the price of the metal has been going nowhere fast.

A speculative metal in hibernation

The technical metrics on the daily chart say it all for the silver market these days as the price momentum, and relative strength indicators are in neutral territory. Open interest, the total number of open long and short positions in the COMEX silver futures market has been gently rising moving from 197,576 contracts on October 19 to 214,502 contracts on November 7. At the same time, daily historical volatility jumped from 8.58% on October 25 to over 23% on November 8. The increase in the metric that measures price variance has been the result of the wider trading ranges on October 31 and November 1.

Silver is trading in the middle of its trading range, and the price action has been nothing short of a period of hibernation for the silver market. Silver has been flatlining, and the metal is ignoring the price action in the gold market which has moved to a higher trading range since mid-October.

Silver is not following gold

When silver fell to its lowest level since early 2016 in mid-September, gold did not follow its precious cousin to the downside. Silver slipped to a low that was 40.5 cents below its mid-August low in September, but gold held at over $30 above its August bottom as silver probed below the $14 per ounce level.

Source: CQG

As the daily chart of December gold futures illustrates, the yellow metal broke out to the upside above technical resistance at the late August high at $1220.70 per ounce on October 11 and has moved to a higher trading range between $1213.40 and $1246 since early October. Gold's move to a higher level could not entice the silver market to move above its levels of critical technical resistance at $14.95 and $15.07 per ounce.

The action in the silver market has been disappointing compared to gold. Over recent months, silver broke above resistance on the long-term chart of the silver-gold ratio which now puts the price of silver at its lowest level compared to gold in a quarter of a century.

Source: CQG

As the quarterly chart shows, silver had not traded this low against gold since 1993 when the prices of both metals were trading at prices that were one-third of their current levels.

On a historical basis, either silver is too cheap or gold too expensive at their current levels, which could mean that a significant move in the precious metals is coming sooner rather than later.

USLV and DSLV can provide explosive short-term returns

While the price of silver has been hibernating, it may not be long before the volatile precious metal decides to explode through the $15.07 resistance level or implode below the $13.635 critical support level. A break to the up or downside will likely attract trend-following speculators who always seem to push the price of silver to extremes during price moves.

I will be going with the flow in the silver market as the current price action has provided few clues as to whether silver is leaning higher or lower these days. However, the extension in the ratio and markets habit of reverting to the mean over time could be a sign that silver will eventually outperform the yellow metal.

For those who do not venture into the highly volatile and leveraged world of the futures and futures options that trade on COMEX division of the CME, the Velocity Shares 3X Long Silver ETN product (USLV) and its complementary product (DSLV) provide an alternative for traders and investors. The fund summary for USLV states:

The investment seeks to replicate, net of expenses, three times the S&P GSCI Silver index ER. The index comprises futures contracts on a single commodity. The fluctuations in the values of it are intended generally to correlate with changes in the price of silver in global markets.

USLV employs leveraged futures and options contracts to achieve its triple performance on the upside in the silver market, and DSLV does the same on the downside. Therefore, both products suffer from significant time decay and are susceptible to reverse splits which eat away at value for traders and investors who overstay their welcome in these products. USLV and DSLV are only appropriate for short-term positions in the silver market, and timing when it comes to entry and exit is the most significant factor aside from selecting the price direction.

Source: Barchart

The price of silver rallied from a low of $14.24 on October 31 to a high of $14.92 on November 2, a rise of 4.8%. Over the same period, USLV moved from $59.49 to $68.06 per share or 14.4% higher or triple the performance in the silver futures market over the short period.

Source: Barchart

December silver futures fell from $14.92 on November 2 to a low of $14.48 on November 6, or 2.9% lower. The inverse DSLV product rose from $31.59 to $34.48 or 9.1% over the period, just over triple the inverse price action in the silver market.

USLV and DSLV can serve as useful tools when it comes to turbocharging results in the silver market but be careful. The split-adjusted highs in the two products demonstrate the high level of risk associated with time decay. USLV was at the $61.23 level on November 8, and in 2012 it was at the $6,513 per share level. DSLV was at $35.05 on November 8 with the price of silver at $14.42, and in June 2013 the price was at $92.19 per share with silver at around $20. Silver is currently 27.9% lower than the June 2013 price, while DSLV is 62% lower. The decay in these products makes them dust collectors in the portfolios of those market participants who hold onto long positions for too long.

Silver is stuck in neutral at $14.42 per ounce on November 8. Each move towards $15 makes the metal look shiny, and at $14 it tarnishes. Eventually silver will break out of its current trading range, and USLV and DSLV could be excellent tools to take advantage of a significant move. My bet is still on the upside, but I will go with the flow if the price starts to break lower.

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.