Silver prices were trading higher for the first six months of this year. It fell into a rut this summer and then hit badly last week. There are three primary factors which have led to this price correction. First is strength in US Dollar which reached its highest since July. The surge in currency is not because of any safe haven buying but because investors are looking forward to Federal Reserve tightening monetary policy. Second factor is US long term interest rate is rising. Rising interest rate creates headwinds for precious metals like Gold and Silver as they don’t offer any yield on their investment. Third factor is high speculative position in Silver. Open interest in both gold and silver were at record high and were on the peak during Brexit. During summer, the open interest felt slightly as prices were stalling. During October, lot of traders were holding on their long position as prices were not breaking down but last week many of the traders started unwinding their position when fresh short positions were created by many banks who were short in the market.
Last week we saw panic selling in gold and silver, especially silver as there was overreaction of traders on Fed hawkish statement. That reflected in forced selling as stop-losses started triggering. However, now there seems to be some stability in the market where volatility has decreased but still in Silver we are seeing more volatility then gold. On the supply side, mine production may tighten this year because output cuts and closures at zinc and lead mines may hit by-product output of silver. If we look at the speculators position, they have shortened their net long position for the first time in three weeks. This is because of selling witnessed last week, therefore many speculators unwound their position.
We are neutral on Silver in the near term and think the correction because of Fed tightening expectation is now overdone. Silver is above its 200 day moving average (DMA) and as long as it holds it head above that level, we feel bulls have chance again to bounce back. Though, we don’t expect any V-shaped recovery. If the recovery happens, it will be gradual. If silver breaks below 200 DMA, then it would force us to go with the flow and adopt negative near term stance. Breaking below 200 DMA will cascade more speculative selling. Silver 200 DMA comes around Rs 41100 and its previous swing low is Rs 41060 so we can safely assume that Rs 41000 is an important support for Silver. Breaking below that may open flood gates till 40250 and 39800. However since last 4-5 trading session silver is consolidating in a range indicating bottom formation may be taking place. Rs 42800 is resistance for the silver. If silver manages to break that level, we can see bounce back to Rs 43950 levels. So any correction should be bought with strict stoploss of Rs 41000 and breaking below that level, long position should be squared off.
The author is Director, Tradebulls