Why One Trader Thinks "Silver's Plunge Is Nearing Completion"

Precious metals fans have had to content with a triple whammy this year: not only is the dollar weaker, not only have cryptocurrencies - seen by some as a natural alternative to safe PMs, especially among the younger generation - soared since the start of the year, blowing out all other asset classes including precious metals, but gold and silver have largely gone nowhere despite a year of political volatility and central bank confusion.

There is a ray of hope however: according to Bloomberg's macro commentator Marc Cudmore, silver's "justified" plunge - as gold and silver have a strong correlation with real rates - is finally nearing completion, as "we are approaching the point where both higher yields and lower yields have the potential to boost the asset class."

The technicals are also turning: "In euro terms, silver is looking stretched to the downside based on its relative strength index, a momentum measure. It should also be supported by its 31-month upward trendline, which it’s testing now." Finally, "Monday is the first day of silver and gold futures trading on the LME. That might provide a fresh source of excitement and buying interest."

Finally, while there are "clear dangers involved when trying to catch a falling silver knife" Cudmore notes that "a risk-reward analysis makes an attempt appealing."

His full Macro View take below:

"Silver’s Justified Plunge Is Nearing Completion", by Mark Cudmore, a former FX trader who writes for Bloomberg

 

Silver is plunging and it’s even worse than it first appears when you consider that the dollar is having a bad year. In euro terms, the metal is down 24% from its April peak. Still, there are reasons to argue that the shift lower is mostly complete. 

 

Gold and silver have a particularly strong correlation with real rates since the metals provide no yield, and hence demand is inversely related to the opportunity cost of speculation.

 

An environment in which global bond yields are rising in the absence of significant inflationary pressures is about as bad as it gets for speculative precious metals, so the move makes sense.

 

However, if the rise in global yields persists, then severe spillover effects in other asset markets could prompt a bid for precious metal havens again. So we are approaching the point where both higher yields and lower yields have the potential to boost the asset class.

 

Technicals also look potentially buoyant. In euro terms, silver is looking stretched to the downside based on its relative strength index, a momentum measure. It should also be supported by its 31-month upward trendline, which it’s testing now.

 

Another thing -- Monday is the first day of silver and gold futures trading on the LME. That might provide a fresh source of excitement and buying interest.

 

There are clear dangers involved when trying to catch a falling silver knife, but a risk-reward analysis makes an attempt appealing

Comments

Pinto Currency 29.5 hours Mon, 07/10/2017 - 09:46 Permalink

The daily price set in London is a complete fiction set with unallocated contract.They trade ~1.5billion oz per day in London with next to no metal - the price can be anything.50 cents or $500 /oz just push the button.http://www.safehaven.com/article/44561/londons-palladium-markets-metal-… he should say is that the price of digital coupons is nearing a low.  Maybe yes, maybe no. What is interesting is that sometime this month, the LBMA is allegedly going to start report how much silver is in the London vaults:https://www.bullionstar.com/blogs/ronan-manly/much-silver-held-lbma-vau… the numbers can be trusted when they are released is another question.The silver price may be in the process of being reset down to allow an increase when these inventories are released.Time will tell. 

In reply to by 29.5 hours

JRev (not verified) Raffie Mon, 07/10/2017 - 12:21 Permalink

"An environment in which global bond yields are rising in the absence of significant inflationary pressures is about as bad as it gets for speculative precious metals, so the move makes sense."...except bond yields are NOT rising globally, they're rising in America and virtually nowhere else. UK holding rates near zero, Southern Europe still negative, Japan near rock-bottom. And this is ignoring that the Fed's rate hikes are merely tokenary (i.e. not even 1%).Same shit, different day.

In reply to by Raffie

GodHelpAmerica (not verified) ArgentoFisico Mon, 07/10/2017 - 08:28 Permalink

Reminds me somewhat of oil, where all the best deposits are exploited first, temporarily reducing the average all in cost, and fooling people into believing this is the new norm. And then cut capex to keep operations afloat in the short term, as they stare at long term output declines, and rising costs.

In reply to by ArgentoFisico

JRev (not verified) ArgentoFisico Mon, 07/10/2017 - 12:37 Permalink

Miners are notoriously difficult to believe, though. Their production costs are constantly fluctuating and almost always juked. Read their prospectus sometime, or listen to an analyst like Jason Burack break down which miners are full of shit. I remember when First Majestic reported their all-in production cost at $21 and Keith Neumeyer insisted that it "couldn't go lower" without massive mine closures. Well silver plunged below $20 shortly after he spoke and yet First Majestic not only continues mining, but spins off a new company entirely! Thanks to the dupes for buying those shares in a bear market, I guess.The fact remains that PRIMARY silver mines account for such a low percentage of mined silver overall it hardly matters whether they close. The second largest in North America closed just last week. Downward pressure on silver hurts those who only mine silver, but so long as copper, zinc, lithium, et. al. remain profitable, silver is merely an ancillary byproduct in the minds of most mining CEOs. Silver was pulled out of the ground for decades with the price per ounce sub-$5. A lot's changed since then, sure, but despite the recent downtrend, silver production has remained steadily UP for over 30 years now. With finished fuel costs at around 2x what they were in the 90s and more silver than ever being pulled out of the ground (despite mining CEOs trying to say otherwise), it's not inconceivable for silver to touch single-digit numbers. 

In reply to by ArgentoFisico

JRev (not verified) Scuba Steve Mon, 07/10/2017 - 13:29 Permalink

A very refined, logical, ad-hominem free argument from yet another First Majestic bagholder. Primary silver mines account for an infintesimal amount of overall production - call me whatever you like if it makes you feel better, mash that down-vote button, but it don't change the numbers.Honestly I'm surprised you can still type with that falling knife through your hand. Just because I think silver may have lower to go doesn't mean I don't think supply/demand fundamentals will overwhelm the paper game at some point. It's called having both a "short term" and "long term" outlook - I know this might be tough for you to comprehend, but sometimes those two outlooks are different! 

In reply to by Scuba Steve

XAU XAG Mon, 07/10/2017 - 07:48 Permalink

Looks to me like it is sinking like a stone with onlyMonthly $15 to stop itweekly 14.70/14.55Monthly $14 to stop it And Last daily $13.69Place your bets

ljag Mon, 07/10/2017 - 07:57 Permalink

I gotta a grand that says I can stay solvent longer than they can manipulate. I hope they run the price down to where I started stacking>$6.90 per the oz.

anarchitect Mon, 07/10/2017 - 07:58 Permalink

Another thing -- Monday is the first day of silver and gold futures trading on the LME. That might provide a fresh source of excitement and buying interest.Flash-crash excitement and selling interest is more like it, assuming that these futures contracts are simply more cash-settled frauds unbacked by actual metal.

Calculus99 Mon, 07/10/2017 - 08:04 Permalink

If we're in a big tech world and tech will probably grow 100x over the coming decades (look at how it's grown 100x times already over the last few decades) and Silver is heavily used in tech, isn't Silver a massive buy anywhere below $20? I don't know, just starting to think about this. 

Peter Pan Mon, 07/10/2017 - 08:07 Permalink

Everyone has a choice.There are many cryptocurrencies and more to come.There are many different banknotes.There is a multitude of metal coins.But there is only one gold and silver.