Gold and Silver miners (Jr and Exploration)

[Edge83]

Silver On The Verge Of A Spectacular Rally

Aug. 17, 2017 6:41 PM ET
Andrew Hecht

Summary

A false breakdown in early July.

Higher lows and higher highs.

Momentum shifts on the long-term charts.

A wide range but a volatile metal.

A higher high than in 2016 could be in the cards before the year is over.

In the 1990s, I was fortunate enough to work with Andrew Hall, the famous oil and commodities trader. In 1995, together with Mr. Hall and two other traders, I was intimately involved in the purchase of 250 million ounces of silver at prices under $5 per ounce. Considering the notorious Hunt Brothers only had a long position of 200 million ounces of silver when they attempted to corner the market in the late 1970s and 1980, the stash of silver under our control was likely the biggest proprietary position in the metal in history.

Unlike the Hunt Brothers, we were not trying to corner, manipulate, or control the silver market back in 1995 and 1996. We just believed that the price was too cheap and it would move higher. Our parent company, Salomon Inc., embraced market risk and a one billion dollar position on a leveraged basis was nothing out of the ordinary in many of the financial markets in which they operated. However, in silver, the quarter of a billion ounces was the mother of all positions. I learned a great deal during the months when we bought it, and as we liquidated the massive cache of 1,000 ounce bars, 250,000 of them most tucked away in warehouses in Brooklyn, New York and near Heathrow Airport just outside London.

The story about the silver position is a topic for another piece, but a position of that magnitude provided an education and the equivalent of a Ph.D. in silver. At $4 the position was worth one billion, today that amount is worth four times as much. However, I am currently seeing signs in the market that lead me to believe that silver is on the verge of a rally that will take it to a much higher level.

A false break down in early July

On the evening of July 6, during Asian trading hours, a massive selling order of 40-50 million ounces of silver hit the COMEX futures market. The timing of the order was likely intentional to create a maximum impact on the price of the precious metals. The execution caused the price to move to a new low for 2017 and the lowest price since April 2015.
Source: CQG

As the weekly chart of COMEX silver futures highlights, the price proceeded to decline to a low of $15.145 per ounce on the active month September contract on July 10. We have not heard so much as a peep from the Commodities Futures Trading Commission about the events of July 6 or the flash crash that occurred in the gold market on June 26 during the early hours of European trading. To me, both orders appear to have manipulation written all over them. Had Phibro operated in the silver market with orders of that magnitude during illiquid trading hours back in 1995 and 1996, I am quite sure that the regulatory body would have been screaming at the top of their lungs and significant fines and perhaps criminal charges would have followed. However, the CFTC has not so much as acknowledged the potential of manipulative behavior by a bad actor or actors in the wake of the two events.

Meanwhile, the silver market absorbed the selling and since it fell to lows at just under $15.15 per ounce, and it has been making higher lows and higher highs since July 10.

Higher lows and higher highs

On Tuesday, August 15 the price of gold slipped to lows of $1272.70 per ounce level on the active month December futures contract, and the price of silver got down to lows of $16.56 per ounce. As the weekly chart shows, silver put in a bullish key reversal trading pattern during the week that ended on August 11.
Source: CQG

As the daily chart illustrates, silver climbed back above the $17 level on the September futures contract, and momentum remains bullish for the volatile precious metal. Silver has been moving higher since the July 10 lows, and short-term support now stands at just above $17 per ounce. It is always a bumpy and volatile road when it comes to the silver futures market. The longer-term charts for silver are looking a lot better these days than they were one month ago.

Momentum shifts on the long-term charts

The slow stochastic, a momentum indicator, continues to point to a bullish trend on the daily and weekly charts.
Source: CQG

The monthly pictorial shows that the price trend in silver crossed to the upside in late July and early August. It seems that the price action following the flash crash in the precious metal created a blow-off low in the silver market. At this point, the monthly chart appears to be in a position where the price of silver can rally and test higher levels.
Source: CQG

The quarterly chart shifted into a bullish trend back in January 2016 after silver fell to a low of $13.635 per ounce. All of the silver charts from the daily through the quarterly seem to be pointing to a coming updraft in the price the precious metal that tends to display the highest degree of price variance.

A wide range but a volatile metal

Since January 2016, silver has traded in a range from $13.625 to $21.095. The midpoint of the range is at $17.36, and COMEX September silver futures were trading at the $17.04 level at the close of business on August 17, 2017. In the wake of the July 6 flash crash, support is at $15.145 with technical resistance at $18.78, the highs thus far in 2017. The midpoint of the 2017 range is at $16.963 per ounce, and silver was trading above that level on Thursday. It would be healthy for the silver market to consolidate in a range from $16.963 and $17.36 and the longer those prices can contain silver, which tends to be a bucking bronco, the better. As we saw over recent trading sessions, that may not be possible in the wild silver futures market. Silver has traded in a wide range of $3.635 range so far in 2017, but a narrowing of the price band could lead to an upside correction in the weeks and months ahead.

A higher high than in 2016 could be in the cards before the year is over

There are four reasons why I believe that the price action in silver will eventually resolve itself to the upside and we could see a return of volatility to the silver market that will take the precious metal to a new high in 2017 and perhaps a level above the 2016 peak at just over $21 per ounce.

First, the dollar has declined from highs of 103.815 on the dollar index in early January to recent lows of 92.39, a drop of 11%. The dollar index is currently trading a lot closer to the lows of this year’s range than the highs. The historical inverse relationship between the dollar and the price of silver supports a higher price for the precious metals.

Second, silver is a trading sardine that tends to thrive during periods of fear and uncertainty in markets. The situation on the Korean Peninsula where the U.S. and North Koreans are at odds is an environment where investors are likely to head for safe assets in a flight to quality. Silver (and gold) have long histories of benefiting from periods of political uncertainty. On the geopolitical landscape, North Korea is not the only problem currently facing the world. The relationship between the U.S. and Russia has deteriorated to a post-Cold War low. At the same time, another wannabe nuclear power, Iran, is keeping a close eye on the current situation with North Korea which could create additional pressure and fear on markets in the weeks and months ahead. Moreover, domestic issues in the United States continue to highlight the divisiveness that has become pervasive.

Third, the ascent of digital currencies is a commentary on the faith in fiat currencies. Silver and gold have long histories as hard assets and means of exchange in the world. The fall of the value of fiat currencies that rely on the full faith and credit of the governments that print and issue the money is another reason why silver could be preparing for a huge price move on the upside.

Finally, the trend in silver on the daily, weekly, monthly, and quarterly charts are all pointing to a bullish trend for the precious metal. Silver could be preparing for a move of epic proportions in the weeks and months ahead and my bet is it will be on the upside. I believe that we will look back at the price action in the wake of the July 6 flash crash as a golden opportunity to load up on silver as the price likely made a very significant low on July 10.

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Disclosure: I am/we are long USLV.

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.

Additional disclosure: 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.

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