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Silver Price Nears Inflection Point

February 29th, 2016 by

The spot silver price is coming to a crossroads where longer-term trends are born.

Silver has been overlooked quite a bit during the recent gold rally, making it an affordable play for contrarian precious metals investors. The prices of the two metals very frequently track one another. Between the two, silver is more volatile—which makes sense, considering a $1 move for the silver price is about the same as an $80 jump in the price of gold.

American Gold and Silver EaglesThis is known as the gold-to-silver ratio (simply the ratio of the gold price to the silver price). Historically, this ratio has been closer to 16:1 as opposed to 80:1. Even 50:1 is seen as a healthier ratio. This growing gap between the two metals has gotten worse during the recent gold rally. At some point, this measure will reach a threshold where something has to give. Many traders use this indicator to simply sell some of their gold and buy into positions on silver.

Coordinated Effort

Making the situation more complicated still is the fact that a large institutional position against silver has built up over the past few months. This means that big financial firms and banks are loading up on the short side of silver. (Anyone surprised?) This contrasts with the global gold market, which is too large and fluid to be subject to coordinated institutional influence. Even if the Federal Reserve or Bank of England, for example, wanted to impact the gold price by selling large quantities, they would always be cancelled out by the consistent purchases from the People’s Bank of China and the Russian central bank.

silver barHowever, central banks don’t usually hold silver as a reserve asset the way they do with gold. It would simply require too many physical ounces to make it economical. Private banks, meanwhile, are not worried about these constraints and can often make their mark on the silver price. JPMorgan was famously in this position over the course of 2013 and 2014, helping push the price of silver consistently lower (while probably scooping up more ounces at a cheaper price on the other side!) through the futures market.

Technical Perspective

The action in the silver price over the next week or so will be a crucial test for the current trend. Silver could approach $14.50/oz soon, a key technical support level. A bounce higher would likely indicate a strong bottom for prices (which would rise thereafter); if the silver price falls below this level, it might spell a longer downtrend instead.

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Spot silver 1-month price chart. Source: Bloomberg

International Influence

Besides the technical aspects, it’s a good idea to keep an eye on how the ongoing global recession could affect silver. More turmoil is usually supportive of higher silver prices.

This is only compounded by the plunge into negative interest rates around the world. Once considered a novelty, the policy is now making the rounds—appearing in Europe and Japan, two of the four largest economic zones on the planet. In fact, the Wall Street Journal reports that over 20% of global GDP comes from areas that are using negative interest rates!

india-flagThese aren’t the only international developments having an upward influence on the silver market. India is famous as the gold-buying capital of the world, yet (for a number of reasons) the home of over 1 billion residents is also the world’s top buyer of silver. It is used as an alternative to gold and is popular for jewelry. However, to curb the huge inflow of precious metals into the country, India’s government has once again increased tariffs on gold and silver. Because essentially none of the imported silver (and gold) ever leaves the country, this continuously adds to India’s trade deficit.

In short, a confluence of factors seem to point toward a stronger silver price—but be sure to watch to see what the metal does at key price levels over the next several trading sessions.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.