Here is my initial take on this, happy to hear from others.
There has being some debates regarding the sharp fall in price of silver, which began in May, with no clear conviction on where we stand, regarding future price direction. I feel we can all agree that the number of margin increase for silver, implemented by COMEX CME exchange in one week was the catalyst to the drop seen in price. However it is worth taking a closer look to ascertain how we make sense of this potential trade.
The issue with the precious metal category, unlike other commodities, is that price determinant is heavily weighted towards mass psychology, when compared to your typical commodity. Silver does at least have more industrial application compared to gold. Nonetheless it is very much tied to the store of value use through its relationship with gold.
The fundamentals surrounding the dollar, hasn’t changed much. Thus the mild correction seen in gold from its high, which was just a reaction to the dollar bounce, as oppose to the heavy decline seen in silver.
Some questions arises from this conundrum:- What is happening to the gold /silver relationship, what is the intra spread relationship for silver and gold telling us about silver, and what does the current interpretation of mass psychology for silver tells us of where price may go in the next six months.
What’s going on with gold and silver ratio?
Since the beginning of the crises in 2008, when the gold/silver ratio reached 85, the trend for gold/silver ratio has being down. This is indicative of strength in the silver market, which has being especially true since august 2010. However it now appears, that the trend has bounced of a significant low which occurred in 1984 and reversed course. This is indicative of weakness in silver compared to gold, and is likely to continue.
As we stated previously, the fundamentals for gold based on lose monetary policies still holds true and by all indication will be true up to at least the end of the year. Thus gold could probably go higher and touch the $1800 level by year end. However the trend of the gold/silver ratio shows probable continuous weakness in silver, with the outcome being silver stuck in a range of $30 - $40, with a possibility of silver forming a head and shoulder pattern and breaking down beyond the mentioned price range, if there is to be a significant directional move.
In addition, the intra spread for silver compared to gold also tells us something about future expectation. A study of Gold futures shows the carrying charge as higher when comparing the longer timeline contracts, to the nearer ones. This shows normal price expectation for gold. However for the silver market there appear to be some instance for which the nearer contract appears more expensive when compared to the longer timeline contracts. This shows negative carrying charge between some silver contracts, and may be indicative of expectation of future decline in price.
Finally, due to the excessive price reaction seen, which has broken the trend line of the previous run up to price level of $50. Confidence in the price trend is now very low. It is always very difficult to restart a trend from a sharp fall like this one. Hence smart money on silver will be flat or short silver the next few months. You should keep an eye on price, open interest and volume before taking a position. It is probably worth keeping a close eye on the activities of ETFs.
My daily blog http://www.gotofinancialtrader.com/apps/blog/
There has being some debates regarding the sharp fall in price of silver, which began in May, with no clear conviction on where we stand, regarding future price direction. I feel we can all agree that the number of margin increase for silver, implemented by COMEX CME exchange in one week was the catalyst to the drop seen in price. However it is worth taking a closer look to ascertain how we make sense of this potential trade.
The issue with the precious metal category, unlike other commodities, is that price determinant is heavily weighted towards mass psychology, when compared to your typical commodity. Silver does at least have more industrial application compared to gold. Nonetheless it is very much tied to the store of value use through its relationship with gold.
The fundamentals surrounding the dollar, hasn’t changed much. Thus the mild correction seen in gold from its high, which was just a reaction to the dollar bounce, as oppose to the heavy decline seen in silver.
Some questions arises from this conundrum:- What is happening to the gold /silver relationship, what is the intra spread relationship for silver and gold telling us about silver, and what does the current interpretation of mass psychology for silver tells us of where price may go in the next six months.
What’s going on with gold and silver ratio?
Since the beginning of the crises in 2008, when the gold/silver ratio reached 85, the trend for gold/silver ratio has being down. This is indicative of strength in the silver market, which has being especially true since august 2010. However it now appears, that the trend has bounced of a significant low which occurred in 1984 and reversed course. This is indicative of weakness in silver compared to gold, and is likely to continue.
As we stated previously, the fundamentals for gold based on lose monetary policies still holds true and by all indication will be true up to at least the end of the year. Thus gold could probably go higher and touch the $1800 level by year end. However the trend of the gold/silver ratio shows probable continuous weakness in silver, with the outcome being silver stuck in a range of $30 - $40, with a possibility of silver forming a head and shoulder pattern and breaking down beyond the mentioned price range, if there is to be a significant directional move.
In addition, the intra spread for silver compared to gold also tells us something about future expectation. A study of Gold futures shows the carrying charge as higher when comparing the longer timeline contracts, to the nearer ones. This shows normal price expectation for gold. However for the silver market there appear to be some instance for which the nearer contract appears more expensive when compared to the longer timeline contracts. This shows negative carrying charge between some silver contracts, and may be indicative of expectation of future decline in price.
Finally, due to the excessive price reaction seen, which has broken the trend line of the previous run up to price level of $50. Confidence in the price trend is now very low. It is always very difficult to restart a trend from a sharp fall like this one. Hence smart money on silver will be flat or short silver the next few months. You should keep an eye on price, open interest and volume before taking a position. It is probably worth keeping a close eye on the activities of ETFs.
My daily blog http://www.gotofinancialtrader.com/apps/blog/
