A silver lining in precious metals?

Will silver breakout of range?

Silver is often an overlooked precious metal, especially in comparison to the publicity garnered by gold and platinum. The last several months has seen silver trade in a range of $18.75 to $20.25 per oz. While picking tops and bottoms is next to impossible, that range did create some nice trading opportunities for market participants. More importantly perhaps, an extended period of consolidation, such as the one that we have seen in the silver market most recently, often foreshadows a significant breakout to either the up- or downside. With the recent uptick by $4.490 on heavy volume, we may have seen the start of a break-out to the upside, with both technical and fundamental factors in agreement.

Fundamental Factors

In February, I wrote an article on Silver, explaining why silver was poised to become the best performing precious metal of 2014. While to date, this has not materialized, more recent developments in silver is giving renewed hope that there may be some truth to that prediction. While there is some debate about the actual cost of producing silver, the consensus cost of production hovers somewhere between the $18 and $22 per oz. mark. With that in mind, the latest trading range for silver is slightly below or at least at the lower end of the production cost spectrum, perhaps suggesting forthcoming price appreciation. That current price level may be unsustainable long-term is further evidenced by some silver mines cutting back on output. The latest example: The world’s largest silver mine, run by BHP Billiton Ltd.'s in Cannington, Australia, announced last week that it was ending production. This should put further downward pressure on supplies, propping prices up. Coupled with a decrease in scrap availability, we may even see a silver shortage.

According to the Silver Institute, physical demand for silver stood at a record 1,081 million ounces last year. The largest component of physical silver demand, industrial applications, dipped by less than 1% to 586.6 million ounces in 2013, to account for 54% of physical silver demand. In the same year, Asia, however experienced a 3% increase in silver industrial demand, led by China, where a continued recovery in the electrical and electronics sector, along with gains in the ethylene oxide industry, took total Asian industrial offtake to a new high. In fact, one of the growing industrial uses for silver is photovoltaic cells in solar panels. As the world seeks alternative forms of energy, this application should continue to grow in importance.

Elon Musk, CEO and Chief Product Architect of Tesla Motors, recently acquired Silevo, a maker of high-quality solar cell modules, through his company SolarCity. As the world economy continues to improve and grow more environmentally sustainable, so will the price of silver. Last year, we also saw a recovery in silver jewelry fabrication according to the Silver Institute – a reflection of the improved economic outlook in the industrialized world.

Technical Factors

Since early December, silver has bottomed just under $19 numerous times, indicating a pretty solid level of support. Last week silver traded above the 50-day moving average of $19.58 as well as the 200-day moving average of $20.52. This may be the beginning of a reversal of the bearish trend that’s been in place for a while now, perhaps creating a new uptrend. Should this turn out to be true, short covering will also come into play. Currently, Comex Silver has a significant amount of short positions especially when compared with other traded commodities. As silver prices start to rise and create a sustained bullish trend, current short positions will have to be covered and offset to limit losses, sending silver prices higher still.

The chart below shows we have now broken through resistance around $20.50. Eventually, silver needs to test the February 2014 high above $22. In fact, if we manage to break through this level, silver may be poised to re-visit $25, a level not seen since August 2013.


Source: Bloomberg 06/27/2014.

About the Author

Jack Malone is a Futures and Options Advisor at RCM Asset Management with a focus on the metals and energy markets. Jack can be reached at jmalone@rcmam.com