Marius Paun | London, UK | Senior dealer | Thursday, 13th August 2020
Silver prices truly exploded since our last report written at the beginning of June this year. Back then, Silver was trading just below $18.00. Last Friday prices were within touching distance of $30.00, over 60% higher in just two months. But on Tuesday night they fell below $24.00, taking a huge hit of 20% in less than 48 hours. Any trader using leverage must have found it incredibly hard to manage risk.
Silver is renown for having just that sort of behaviour. It does nothing for a long time, sometimes years and then one day it wakes up and surprises everyone with its sharp moves. The corrections can be brutal as latecomers to the party must have experienced this week. Even allowing for that significant pullback it’s safe to say we had a massive bull market. From March lows silver has increased well over 100%. Now there is one question in everyone’s mind?
Is that the end of the bull market for silver?
I mean a 20% retracement from the recent highs, technically it means bear territory. The fact is prices have gone ahead of themselves, far ahead of even the short-term moving averages. Silver, as well as gold, were too frothy and a correction was overdue.
What has changed from the fundamentals point of view? Many are in the agreement that very little has in fact changed. In fact, money that was pumped into the world economy in the aftermath of the coronavirus outbreak seems to have worked its way down the food chain (as opposed to the intervention post-2008 financial crisis). Large caps stocks and even mid to small size together with commodities and precious metals, in particular, have benefited enormously during the last few months from that infusion of liquidity.
On Monday the US dollar posted a bit of a comeback rally as investors were following closely by the escalation of the trade dispute between the US and China ahead of the key trade discussions scheduled to be held on August 15th. The US President Trump continued to threaten China of rolling back Phase 1 of the trade deal. He upped the ante adding more tariffs or economic sanctions for Chinese house names like TikTok and WeChat. As the greenback is the go-to safe-haven currency, it enjoyed a rebound although that seems to be a rare feature lately. That could have exacerbated the selloff in the precious metals especially silver at the start of the week.
It was visible the next day when the dollar reversed its gains over the US Congress inability to reach a consensus for the latest stimulus package to address the Covid-19 economic effects. There are almost 5.2 million cases in the US alone as of August 13th according to John Hopkins University and millions are still unemployed. President Trump accused Democrats yesterday of refusing to negotiate a fresh package, consequently, a result is yet to be reached for the fifth day.
On top of that, negative real yields, as inflation is still above the low-interest rates, does not seem to go away any time soon. Appetite for precious metals in the current times of turmoil is unlikely to fade. So the long term bullish picture for silver hardly changed. Unless we see a vaccine available sooner rather than later, a correction like we’ve seen in mid-March has probably little chance of coming to fruition. Nevertheless, traders will be watching the silver closing price for the week to gauge the next possible directions on the short term.
Overall the bulls are still in control as the uptrend remains in place. However, in the short term, further pullbacks or even consolidation around current price levels can not be discarded. The price now sits between the short and long term moving averages. In addition, the short term MA has inverted and started to point downwards so we can see a few conflicting signals on the chart.
On the downside, the bears will be looking for a push below the first support around $25.5 today’s lows followed by $24.35. If they are successful the momentum could push to a further drop and potential retest of the selloff’s low at $23.58. A breach under that hurdle would bring closer to home the thought that a near-term market top might be in place.
On the upside, the bulls next target are closing above resistance seen at $26.7 and then just below $28.00 mark. Ultimately, they would certainly want to see a break above the recent high of $29.81. If that level gets retested and buyers fail to push through it could signal that for now, silver is ready to take a breather.