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When silver goes wild – on breaking 30 USD resistance and why it matters

2024-05-30
When silver goes wild – on breaking 30 USD resistance and why it matters
Desc

Recent price developments on precious metals are eye feastening to gold and silver investors. And in recent development, silver broke its leash, and for the first time in years, firmly crossed solid resistance at 30 USD. Today, we’ll focus on silver’s price action occurred in second half of May 2024.


Recent price action on white metal

Silver plays crucial role in the global green economy, particularly in renewable energy technologies and sustainable practices. It’s also element of significant importance for electrical devices as electricity conductor. In simplified terms – if device of any sort has on/off switch, then it most likely contains white metal. In addition, it is metal used widely in jewellery and one of the physical investment precious metals. We remain convinced, that our esteemed readers are well aware of these facts, and so we pulled these out only for the purpose of introduction.

Silver had spent last 4 years consolidating under 30 USD per ounce, but finally broke out on 17th of May. Breakout had been initiated during European markets being opened, but majority of positive price action occurred during US session. What is interesting such strong upward move, that broke not one but at least two important resistance levels, occurred on Friday. Precious metals traders and investors are well aware on significance of Friday pm sessions as they did tend to deliver strong pre-weekend dumps in the past. This time however to everyone’s rejoice, direction was different.

On Monday 20th and Tuesday 21st, silver continued its strong momentum and attempted to push more up north, this time right away on opening of Asian trading sessions. We’ll cover Shanghai later in out text, but for now let’s focus on price valuation in our peck of a woods. So on Monday and Tuesday silver continued its move upwards and reached another resistance at 32.50 USD, attacked it twice, but eventually has been pulled back. These two subsequent sessions were volatile which is confirmed by lengthy wicks on daily candles, with tops at around 32.50 and bottoms at around 31 USD. However technical daily indicators were signalling white metal to be overbought (RSI over 70, high MACD) and so, silver returned at 30 USD to re-test its breakout point. As on late 27th of May it made rebound to 31.64 USD.

But it’s not just silver that made strong upward moves on 20th of May. Overnight, gold and copper both hit record highs, and many investors continued to pile in on metals. Copper continued to focus on lingering supply deficits, which in effect set new price records on London Metal Exchange, while gold… gold is simply an asset that performs well in times of chaos, but also stagflationary environment we’re currently seem to be at.

In technical analysis, common principle is that broken resistance becomes support, and if harder it is to defeat, then to even stronger support it turns. If we have expectations on white metal to carry on north – let’s face it, after four years long consolidation, yes, we have - silver should now find support near 30 USD before consolidating higher. Note that intra-week or even a single weekly close below 30 USD could still fit within frameworks of a retest. From technical point it is possible (but of course not certain) to reach even 29.35 USD on short-term downturn basis, which could be hit intra-day, before market recovers 30 USD. Note, previous retest which occurred following the long-term primary downtrend, just two months ago – and seems to be a textbook perfect. Assuming the retest holds, silver's time to shine should unveil in front of our eyes, unless clear negation of the breakout occur.


Silver
Technical look on silver. Breakout in progress? Source: iGold Advisor

Also, please bear in mind that apart of breaking horizontal resistance at 30 USD, at the same time silver made another important technical breakout up, from consolidation in form of wedge, basically killing two birds with one stone. In this case, upper resistance line could be drawn just based on tops from recent years, however very often is being presented as extension of 2011 price action.


Silver
Silver made breakout through two important resistance levels. Source: Tradingview

Well… we could also mention on 40+ years in making cup and handle formation, but let’s be serious – technical analysis has limitations, and we aim for certain timeframe for return on investment. But… is that inverse head and shoulders we possibly see on right side of the chart?

Now, with regards to more recent candles, According to Kim Cramer Larsson, Technical Analyst at Saxo Bank, spot, silver has bounced from the 0.382 Fibonacci retracement at 30 USD per ounce. With daily RSI still showing positive sentiment with no divergence, silver could push back to levels above 32.52 USD. Passing through this barrier means, there would be no serious resistance until around 34.40 –35.40 USD.


Silver
Silver held on Fibo 0.382, breaking 32.50 remains within possible scenarios for last week of May. Source: Kitco

Now, if we could compare, 30 USD barrier was to silver exactly, what infamous 2000 USD used to be for gold. However while gold drifts now on uncharted territories, same cannot be said on white metal. Former nominal price records are just below 50 USD, and had been set in January 1980 and in April 2011. Considering however current financial, fiscal and geopolitical set of tensions, combined with certain shortages or flow congestion, it seems to be very possible that even higher price levels may lie within range of currently occurring cycle. And so, while 30 USD remains technically important, bringing happiness to those owing it in portfolio, in longer timeframe silver remains in consolidation zone, similar to the one which gave us breakout to price records in 2011. Assuming that history rhymes, it cannot be entirely excluded, that if parabolic pattern materialises – as seen recently on cocoa or simply as observed per 2011 silver price action – we may experience silver at around its current price records even this year. In the meantime however, let’s enjoy 30-ish USD and patiently await for another breakout and attack on next solid resistance at 46-48 USD range.

And so, long term consolidation with bottoms at around 22 USD levels, which at some point in 2022 even gave us dips at 18 USD, resulted in recent heights at 32.50 USD. That is very nice return on investment considering timeframe, but also dramatic move indicating that economy may not be in best of its shapes. Besides, in macro trend, fundamentals are supportive for silver even despite (or maybe we should rather say ‘due to’) stagflationary environment. Mark Twain once said (or should we rather say, below is attributable to him):

History never repeats itself, but it does often rhyme

…which makes us think on certain similarities to what was happening in 70’s.

Remarks on gold to silver very special relation

Cannot fully discuss silver’s price action without briefly touching its relationship to gold. After all, of all precious metals only these two are being strongly used for variety of investment purposes. Platinum and palladium remain metals predominantly used for industrial purposes. Gold remains investment asset for reasons covered in our analysis multiple times in the past. For silver, although predominantly used in industrial applications, usually in between 1/3-1/6th of demand output comes from investment sector.

For majority of time all eyes are being focused on how gold moves. Especially since it is precious metal purchased by central banks, and recently East makes purchases like there’s no tomorrow. Gold is being considered as inflationary hedge and ‘must have’ type of investment in the times of turmoil and peril. For majority of time silver underperforms in terms of price action’s strength to its scarcer yellow cousin. However it tends to have stronger upward and downward movements. Although this relative volatility may be discouraging to some investors, right timing and patience may vastly increase returns on silver investment. And that is why silver is often being referred as ‘gold on steroids’. And now, at last it seems silver starts to catch up.


XAU & XAG
XAU & XAG for 2024 (up to end of 24th May) in percentagewise growths. Source: Tradingview

Above graph presents XAU & XAG for 2024 (up to end of 24th of May) in percentagewise growths. With beginnings of April, so far underperforming silver surpassed gold and speeded up in May. Analysis of historical moves indicates clearly, that when silver break its leash, it rushes up north with more haste than its yellow cousin. This could be seen in 2020 (Covid), 2011 (post previous financial crisis), 2007-2008 and bit prior (subprime mortgage crisis), around 2000’s (dot com bubble burst), 1980 (US recession) and even through large portion of stagflationary 70’s. Same type of behaviour unveils now, in third decade of 21st century.

Same strong move could be noted on XAU/XAG, so gold to silver ratio, which measures proportion of how many silver ounces we’d have to pay for ounce of gold. Which may be slightly inadequate for silver’s potential, as economic and geopolitical factors currently benefits gold. With gold to silver ratio at around add/take 80, with Covid tops at 126.4, there is very little in the way of monetary factors priced into silver, basically being limited to historical relation between both. But still, silver remains strongly influenced by gold, rising approximately twice as fast. Oh, and by the way - gold/silver spot ratio reached a record high of 132.4 in 1933 during Great Depression. Same ratio collapsed to as low as 17.9 before President Nixon took the U.S. off the gold standard in 1971.

Again, from technical point of view, we also have technical breakout on gold to silver ratio, benefitting silver as a result and opening possibilities.


Silver
Silver benefitting breakout occurred on gold – silver ratio. Source: Investing.com

Below graph is simply an extension of above. Of course it presents relation of spot prices, hence pure proportion between metals and no intermediary premiums applicable. Current ratio stands at 76.87 (as on 24th May), which indicates that silver is still relatively cheap in comparison to gold. Generally speaking similar approach is to be applicable here as in case of RSI – technical indicator. XAU/XAG over 70 indicates cheap silver, while under 30 indicates silver is expensive. However 1 to 30 it was last seen in more historical times – hence phrase ‘generally speaking’ two sentences ago. But observing this ratio since 2007 we have certain resistance between 70-60 level, and record ratio of 1 to 31 reached in 2011.


XAU/XAG
XAU/XAG ratio tells us if silver is undervalued or overvalued in terms of price to gold. Source: Tradingview

Let’s try to apply bit more technical approach to both of the above. Gold to silver ratio daily chart shows selloff that occurred since March 2020 peak and unfolded in 5 waves impulse. It ended in wave A at 62.51. Ratio then corrected in 3 waves as a zigzag Elliott Wave structure. Up from wave A, ended at 82.13. Wave B dips ended at 74.65. The Last leg - wave C - ended at 96.49 which completed wave B. Please note, that rally finished Fibonacci extension of wave A. This supports idea that the right side of our graph is and has to be bearish (aka silver getting stronger). Ratio has turned lower in wave C. Down from wave B, wave 1 ended at 74.63 and wave 2 rally ended at 92.1 as a zigzag. Recent 2023-2024 development shows, ratio has then resumed lower again. And so it may be reasonable to expect ratio to extend lower in months to come, supporting silver and suggesting silver will from now on outperform gold. It doesn’t mean reversal on gold, just that ‘metal on steroids’ now will act faster and stronger.


Gold Silver prices
Technical look on gold to silver ratio. Elliot Wave. Source: Elliot Wave Forecast

Indicators and technical approach suggest, silver started its positive price momentum. Technical correction was therefore needed at this stage as silver was red hot and fuming. Now it continues its shallow correction and upon gaining breath at 30 USD, move upwards seems to be very possible. Hence it may be last and final opportunity window to acquire really cheap silver.

All eyes on markets and volumes

In attempt to track this fantastic price action, let’s turn our gaze towards most important silver-bugs in the world - Asia. And later to Comex as well. Since some time now, arbitrage between Shanghai and New York and London was higher than usually. Above was applicable to both gold and silver (we covered this subject on gold extensively in our past ‘120 USD Shanghai’s price arbitrage on gold’). And so, in longer perspective Asian prices were in upward trend since some time and alhough arbitrage between markets didn’t treturn to normality, it steamed off a lot, becoming more reasonable. Silver in Shanghai crossed 30 USD undisputedly on 8th of April and since then constantly oscillated in between 30-32 USD per ounce. On 17th of May closure occurred at 7650 yuans, just 2 yuans less then daily top, which was equivalent of 32.96 USD. This is the date when European and later US sessions led to breaking resistance at 30 USD. But it was Friday, and so for a weekend trading ceased, although expectations remained.

Monday the 20th May had been opened strongly in Shanghai. Daily limit for move up for silver on Shanghai Gold Exchange is 12%, while the daily limit up for SFE is 8%. Silver on Shanghai Futures Exchange has opened at such price cap, which translated to price of 8211 CNY / kg. With simple application of exchange rate and turning kilobar onto troy ounces it looked like SFE’s prices would be equivalent of 35.27 USD per ounce. And while silver on SGE didn’t reach similar cap, it continued to trade at approx. 9% up at some point, which would be 8275 CNY / kg intraday and 8229 (35.38 USD) closing. Needless to say, that nearly all shorts had been liquidated, or changed its owners to those with deeper pockets, able to fulfil margin requirements. Also, necessity to meet tight deadlines of margin calls provided even more fuel for growths.


China
China SGE/SFE Daily Report for 20th May 2024

Shanghai continued to trade prices higher overnight, SGE adjusted margin ratios and price limits. Physical silver demand did skyrocket, while sellers were adjusting prices accordingly to demand. Silver on Chinese e-commerce platforms went to equivalent of 38-39 USD per ounce. Also, local miners had been revaluated on local stock exchanges. Growing trend was continued however silver had been pulled back from new intraday heights to closing at equivalent of 35.49 USD. However on this occasion stock of silver vaults on SFE dropped and set new lows since 2020. And to pay homage to what silver made in China, and to show scale of volumes involved, let’s just indicate, that trading volume on SFE reached 417.8 billion yuans on 21st of May, surpassing total daily volume of transactions in Shanghai stock market inc. bonds and other commodities.


China
China SGE/SFE Daily Report for 21th May 2024

On 22nd of May, it clearly looked silver started to lose momentum. It established new all-time high closing Shanghai prices at 8313 yuans per ounce, which is equivalent of 35.69 USD.


China
China SGE/SFE Daily Report for 22th May 2024

However despite of higher closing, northern wick didn’t surpass one from preceding day. So Shanghai managed to set new closing record on that day, but keeping higher prices on intraday turned to be unsustainable for now.


China
China SGE & SFE price action on May 2024

Similar price growths could be observed on Comex, with intraday tops in the period described at 32.5 USD. On 21st of May, Comex open interests for silver were at 188,345 contracts (each for 5k oz). That was level of interest unseen since January and February 2020. Above was composed of total of 83k commercial net shorts, nearly 60k non-commercial / large speculators having longs and nearly 23.5k small speculators longing silver as well. And so, both growths - occurring in New York and Shanghai – were justified by higher volumes.


Commitment of Traders
Commitment of Traders on Silver for last 5 years. Source: Barchart

To conclude

27th of May was Bank Holiday in UK (LBMA, LME) but also Memorial Day in USA (Comex). This means, US futures markets are closed, and without solid trading volumes from New York and London, it is predominantly Asia conducting rhythm and direction of how silver performance unveils today. We’re writing these words on late evening of 27t of May with silver at 31.64 USD. Lack of western markets is visible on daily volume, however it is not dramatically low. Shanghai closed session on 34.65 USD, which is equivalent of 8077 yuans. That is very much in the middle between intraday highs and lows.

Even despite of what possibly could happen to price of silver in last weeks of May, its mid-term outlook looks very bullish.

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