It Is Just A Matter Of Time For Silver
- A new high leads to price consolidation.
- Bullish price action over the past year - Silver has not returned to its breakout level.
- Silver mining shares consolidate - SIL and SILJ in holding patterns.
- Silver is a sneaky market.
- Expect fireworks - Sooner rather than later.
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In my last piece on silver on Seeking Alpha on February 1, I outlined how GameStop (GME) and silver were two peas in a complicated pod. On that day, silver rose to a new high at $30.35 per ounce on the continuous COMEX futures contract. Since then, the price has corrected and has entered a consolidation phase. On last month’s final trading session, the price dropped by $1.245 per ounce to settle at $26.44 on the active month May futures contract. Silver posted a 40 cents per ounce loss in February, while gold fell by over $110.
Silver and gold continue to have a lot going for them in 2021 despite the pullbacks. Central bank liquidity and government stimulus are inflationary seeds that have been blooming all over the commodities market. In February, crude oil, lumber, copper and other base metals, sugar, coffee, soybeans, cotton, and hogs all posted new highs. In some cases, the peaks were levels not seen in years.
At over $26, silver remains well above its critical technical support level at around $21 per ounce. The current level could be the perfect place to consider adding silver mining shares to your portfolio. The Global X Silver Miners ETF (NYSEARCA:SIL) and the ETFMG Prime Junior Silver Miners ETF (NYSEARCA:SILJ) products are likely to outperform the price of silver futures on a percentage basis when the precious metal decides to rise to a new high.
A new high leads to price consolidation
While the continuous COMEX silver futures contract reached a high of $30.35 on February 1, the May contract’s peak was at $30.04 per ounce. Since falling from the high on February 2, May futures have traded in a range between $25.98 and $28.47 per ounce.
As silver continues to consolidate, the price was trading at the $26.60 level on March 1. Open interest, the total number of open long and short positions declined from 184,832 contracts on February 1 to 160,964 on February 26. Falling open interest and declining price is not typically a technical validation of an emerging bearish trend in a futures market. The correction took price momentum and relative strength indicators below neutral readings, but they were sitting above oversold conditions on the first trading session of March. Daily historical volatility at 28.3% was below the February peak at above 67% as silver remained within the $2.49 band.
The new high at the start of February led to a period of price consolidation, which could be a healthy sign for the volatile silver market. On the final session in February, the price dropped $1.245 as most commodities posted significant losses. However, the silver price remained within the trading range despite the price decline.
Bullish price action over the past year- Silver has not returned to its breakout level
Silver broke out above the July 2016 $21.095 high in July 2020.
As the monthly chart highlights, since breaking out to the upside in July 2020, silver never returned to the long-term technical resistance level that became critical support. The low since silver nearly reached $30 in August has been $21.96 in September. The precious metal made higher lows over the past five months.
After the recent correction from a higher high at the beginning of February, monthly price momentum and relative strength indicators are sitting above neutral readings, reflecting the ongoing price consolidation.
Silver mining shares consolidate- SIL and SILJ in holding patterns
Silver mining shares typically provide a leveraged return compared to the metal’s price as they tend to outperform on rallies and underperform on price corrections on a percentage basis. The leading mining stocks offer less leverage than the junior mining shares. Junior miners often concentrate on exploration, which makes them more volatile.
Individual senior and junior mining shares carry idiosyncratic risks like management performance and the output and a range of problems that can occur at specific mining properties worldwide. A portfolio approach can mitigate some of the idiosyncratic exposure risks in silver mining.
The Global X Silver Miners ETF (SIL) and the ETFMG Prime Junior Silver Miners ETF (SILJ) are the senior and junior ETFs that hold portfolios of the companies that extract silver from the earth’s crust and explore for new silver deposits. The fund summary and top holdings of SIL include:
Source: Yahoo Finance
SIL has net assets of $1.16 billion, trades an average of over 685,000 shares each day, and charges a 0.66% expense ratio. May silver futures rallied from $24.095 on January 19 to $30.04 on February 1 or 24.7%. Silver then dropped to a low of $25.98 on February 4 or 13.5%.
Over the same period, the SIL ETF rose from $41.50 to $51.35 and then declined to $41.71 per share. The senior mining ETF product moved 23.7% higher and 18.8% lower. While SIL underperformed on the up and downside during the most recent rally, the move that took the continuous contract from $11.74 in March 2020 to $29.915 in early August 2020 or 154.8% higher took SIL from $16.00 to $52.87 or 230.4% to the upside.
The fund summary and top holdings of SILJ include:
Source: Yahoo Finance
SILJ has net assets of $684.66 million, trades an average of over two million shares each day and charges a 0.69% expense ratio.
From January 19 through February 1, SILJ rose from $14.21 to $18.46 or 29.9% and then fell to $14.51 on February 4 or % from the peak. 21.4% as it outperformed the silver futures market on the upside and underperformed during the correction. Meanwhile, from the March 2020 low to the early August 2020 high, SILJ rallied from $4.84 to $17.21 or 255.6%, silver futures and the SIL ETF.
The SIL and SILJ ETF products provide leverage without one of the risks carried by many ETFs with gearing. They own shares rather than options and derivatives. Therefore, while they are volatile, the products do not suffer from time decay.
Silver is a sneaky market
Silver can be a very wild market. Last year, the price moved from an eleven-year low to a seven-year high in five months. Silver is all about sentiment, so trends are critical. Silver has been outperforming gold over the past year. The silver-gold ratio reached an all-time high last March when silver fell to the lowest level since 2009, and gold remained above its bottom from 2019.
The daily chart of April gold divided by May silver futures shows that the ratio reached a high of 126.1 ounces of silver value in each ounce of gold on March 18, 2020. The value of silver versus gold reached its lowest level for silver and highest for the yellow metal since gold began trading on COMEX in 1974. Silver not only recovered against gold over the past year, but it took fewer than 65 ounces of silver to purchase an ounce of gold on March 1, the lowest level since mid-2014.
Silver can be a sneaky market as speculative, and investor demand for the metal drives the price. Silver offers market participants a far lower per ounce price than gold, wide price variance, and substantial returns when the price decides to move higher or lower. The current price consolidation is a healthy sign for the silver market as it digests the move to the $30 level for the first time since 2013. Market participants looking for a continuation of bullish price action in the commodities asset class could stampede into the silver market over the coming weeks and months. Copper is at a decade high, lumber recently rose to a record peak, and many other raw materials are at multi-year highs. Silver’s ultimate target is at the $50.36 high from 1980. I believe we will see a new record high in the silver market over the coming months and years, but it could be a very bumpy ride to the upside, as we witnessed in 2020.
Expect fireworks- Sooner rather than later
The industrial demand for silver continues to rise as the metal is a critical component in solar panels. However, it is speculative and investment demand that will eventually drive the price higher.
Markets across all asset classes are not going to sleep any time soon. Monetary and fiscal policies continue to weigh on fiat currencies’ purchasing power. Silver’s landscape has not been as bullish since 2008 through 2011, when the price moved from $8.40 to $49.82 per ounce. Meanwhile, with the stimulus and liquidity levels higher today than during the global financial crisis, the coming years could see an inflationary spike that ignites silver to prices analysts have yet to consider. Bull markets tend to rise to unreasonable, irrational, and illogical levels. Picking tops in a bull market has caused financial ruin for more than a few market participants.
Look to ride the silver market’s bumpy trends but hold onto a long core position in the metal. Never look to buy bottoms or sell tops. The goal should be to take a significant percentage out of price trends. When silver takes off to the upside, following the trend will allow you to stay in a long position without emotions for far longer than logic may dictate. Logic and markets can be mutually exclusive during parabolic moves.
At some point, I expect silver to move into a parabolic period. Be prepared to enjoy the ride. The mining shares ETF products, SIL and SILJ, could be excellent tools for trading silver market trends as they provide leverage without time decay.
The Hecht Commodity Report is one of the most comprehensive commodities reports available today from a top-ranked author in both commodities, forex, and precious metals. My weekly report covers the market movements of over 20 different commodities and provides bullish, bearish, and neutral calls; directional trading recommendations, and actionable ideas for traders.
This article was written by
Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.Over the past two decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities.
Andy understands the market in a way many traders can’t imagine. He’s booked vessels, armored cars, and trains to transport and store a broad range of commodities. And he’s worked directly with The United Nations and the legendary trading group Phibro.
Today, Andy remains in close contact with sources around the world and his network of traders.
“I have a vast Rolodex of information in my head… so many bull and bear markets. When something happens, I don’t have to think. I just react. History does tend to repeat itself over and over.”
His friends and mentors include highly regarded energy and precious metals traders, supply line specialists and international shipping companies that give him vast insight into the market.
Andy’s writing and analysis are on many market-based websites including CQG. Andy lectures at colleges and Universities. He also contributes to Traders Magazine. He consults for companies involved in producing and consuming commodities. Andy’s first book How to Make Money with Commodities, published by McGraw-Hill was released in 2013 and has received excellent reviews. Andy held a Series 3 and Series 30 license from the National Futures Association and a collaborator and strategist with hedge funds. Andy is the commodity expert for the website about.com and blogs on his own site dynamiccommodities.com. He is a frequent contributor on Stock News- https://stocknews.com/authors/?author=andrew-hecht
Analyst’s 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.
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. The author is long silver.
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