April 12, 2021

Silver Consolidates, the Path Remains Higher

By Andrew Hecht


Silver can be the most volatile of the precious metals that trade on the COMEX and NYMEX divisions of the Chicago Mercantile Exchange. In 1980, the price rose to the all-time high of $50.36 per ounce. In 2011, the price fell short of that peak when it managed to reach $49.82.


Silver traded below $10 from 1985 through 2005 for two decades. Silver has not traded below ten bucks since 2008. 2020 was a wild year in the silver market as it traded in an $18.175 range and put in a bullish reversal trading pattern on the annual chart.

Silver - Annual (1)


Source: TradingView

As the annual chart highlights, silver fell below the 2019 low and closed above the high from that year. Silver has remained above the $23.70 level so far in 2021 and was north of twenty-five bucks on Friday, April 9.
Silver is consolidating and digesting its most recent high in early February. The odds continue to favor higher silver prices over the coming months and years, but the road will be bumpy.


Silver sits at the $25 Level

 

On Friday, April 9, nearby May COMEX silver futures settled at the $25.325 per ounce level.

Silver - Daily (2)Source: TradingView

 

The daily chart shows that since reaching the low for 2021 at $23.74 on March 31, silver has been edging higher. Open interest, the total number of open long and short positions in the silver futures market, has climbed from 151,403 contracts at the end of March to over the 160,000 level. Increasing open interest when a futures price rises tends to be a technical validation of an emerging bullish trend. While relative strength is neutral, the price momentum indicator is rising. Daily historical price volatility is sitting at the 24.70% level, closer to the low than the high in 2021. Silver is consolidating and waiting for the next move after a highly volatile year in 2020.


An eleven-year low and a seven-year high in 2020 - A higher high in Q1 2021

 

Last year, silver traded in over an $18 per ounce range from low to high.

Silver - Monthly (3)Source: TradingView

As the monthly chart illustrates, the March price carnage in markets across all asset classes took the price to a low of $11.74, the lowest in eleven years since 2009. Five months later, in August, silver futures rallied to the highest price since 2013 at $29.915. In early February 2021, the price made a marginally higher high at $30.35 to keep the bullish trend intact. Critical technical resistance in the silver futures market stands at the July 2016 $21.095; the level silver broke higher above in July 2020. Above the 2021 peak, the next upside target is at the October 2012 $35.445 level, a gateway to the 2011 and 1980 highs.

 

Liquidity, stimulus, and US energy policy support silver

 

Even though US GDP is projected to climb by 6.5% in 2021 as the country emerges from the global pandemic, the Fed and US government are keeping their feet on the accommodative pedal. The Fed Funds rate remains at zero, and the central bank continues to purchase $120 billion in government debt securities monthly. The tidal wave of liquidity is highly inflationary. Meanwhile, the Fed is encouraging inflation; after boosting its target to an “average” of 2% last August, it has repeatedly stated it is prepared to tolerate inflation above the average target rate. Last Friday, the latest PPI numbers signaled the Fed is getting its wish as prices rose.


The US government has unleashed a tsunami of stimulus on the financial system. In 2020, the US Treasury borrowed an unprecedented $3 trillion to fund the programs. In 2021, they are borrowing trillions more to stabilize conditions during the pandemic. President Biden released his latest budget proposal that amounts to over $1.5 trillion. He also announced an infrastructure rebuilding initiative of over $2 trillion this year. The US debt will rise above the $30 trillion level by the end of this year. Inflation supports a higher silver price.


Meanwhile, addressing climate change has changed US energy policy away from fossil fuels and towards alternative sources. The sun is an energy provider of the future that will reduce production and consumption of hydrocarbons. Solar panels that convert sunshine into energy and store the power require silver.

 

China's digital currency is another bullish factor

 

Another factor supporting silver, precious metals, and all commodities, is the decline in purchasing power of fiat currencies. Inflation erodes money’s value. Bitcoin, and other digital currencies, have experienced dramatic price appreciation over the past months. After closing 2019 at the $7,220 level, CME Bitcoin futures rose to $29,220 at the end of 2020. In 2021, the high has been $61,255 per token, with Bitcoin just below $58,700 at the end of last week. Bitcoin’s market cap is now over $1 trillion, with the asset class flirting with the $2 trillion level.


The trends in digital money tell us that the dollar, euro, and other fiat currencies that derive value from the full faith and credit of the countries that issue the legal tender is declining. China is working furiously to release a Chinese digital currency. Global acceptance of a digital yuan could threaten the US dollar and euro’s positions as world reserve currencies, weighing on their values. A devaluation of the dollar and euro could send gold and silver prices substantially higher. Since silver tends to be more volatile than gold, we could be on the verge of an unprecedented rally in the precious metals. Russia is also developing a digital ruble, while the US and Europe seem to be asleep at the crypto wheel.


Gold and silver have been means of exchange for thousands of years, dating back before the bible’s old testament. Central banks hold gold, but few hold silver as a reserve asset. However, both metals have been appreciating since the turn of this century. The long-term trends are higher, and the trends are always your best friends in markets.

 

Expect the unexpected in the silver market

 

If we learned anything from silver in 2020, technical levels do not mean much when the price begins moving higher or lower. Silver broke down, creating price carnage in March. The precious metal then exploded higher to a multi-year high and has remained above its support level.


We should always expect the unexpected in the volatile silver market, but many signs point higher for the coming months and years. When the price begins moving higher again, it will be challenging to hop on the bullish freight train. The perfect time to add some silver to your portfolio could be during the current price consolidation. Silver may trade to lower levels over the coming weeks if the US bond market continues to fall and the dollar strengthens. However, the prospects for higher silver prices remain compelling as the US central bank and governments worldwide seem to be embracing inflation. Whether they can tame the economic beast when it really begins to rise is another story. Silver is a commodity that will reflect the economic landscape, which points higher for the metal.