Silver Breaks Out Of A Wedge Pattern

In March 2020, the global pandemic gripped markets across all asset classes sending them to lows before turning higher. Few markets experienced the volatility seen in the silver market. Nearby COMEX silver futures dropped to an eleven-year low in March 2020. Five months later, in August 2020, the price rose to a seven-year high. Silver tends to move like gold on steroids as it attracts far more speculative interest when the price moves. In March 2021, silver looks ready to make a move higher, and the sky’s the limit for the precious metal that can deliver head-spinning volatility. The iShares Silver Trust ETF product (SLV) is a highly liquid trading and investment vehicle. 

Silver broke out of a consolidation wedge pattern 

The active month May COMEX silver futures contract reached a high of $30.16 per ounce in early February 2021. 

As the chart highlights, after reaching the February 2021 high, silver made lower highs and lower lows before finding a bottom at $21.459 in late September 2021. Since then, silver made higher lows, as the precious metal established a wedge pattern suggesting that a substantial move was on the horizon. 

The first technical resistance level was at the November 2021 $25.41 high. In late February, the price eclipsed that level, breaking out to the upside and reaching the latest peak at over $27 last week. 

The next significant target is at the $30 per ounce level

While there is minor technical resistance between the recent high and $30, the critical level stands at the February 2021 $30.16 high. 

The longer-term chart shows above $30.16, the next upside target stands at the September 2012 high at over $35 per ounce. The ultimate targets are the 2011 $49.52 peak and the 1980 $50.36 all-time high. At just below $26.50 at the end of last week, silver has lots of room on the upside if the break from the wedge pattern ignites a bullish frenzy in the silver market. 

Three reasons why silver loves to spoof the market with technical violations

Silver loves to spoof market participants with false breakouts and breakdowns. The last significant example came in March 2020 when the price defied all technical levels and fell by over 37.8% in under one month. At the February 2021 high, the price looked like it was headed for a challenge of the all-time peak when it reversed. 

Three factors make silver one of the most difficult technical markets:

• Silver prices move higher or lower on sentiment- Speculators tend to pile in and out of the silver market when they see a trend developing.
• Silver is an emotional metal that moves higher and lower on fear and greed. 
• The silver market has a long history where attempts to corner supplies and manipulate the price causes extreme price variance. 

Silver is a feast or famine metal that can sit in a tight trading range for months or years and explode or implode over short periods.

Three reasons why silver could soar and reach new all-time highs

In March 2022, the economic and geopolitical landscapes favor the upside in the silver market. The leading factors that are likely to push silver prices higher are:

• Inflation is at the highest level in four decades. Silver is an inflation barometer as the economic condition erodes money’s purchasing power. 
• The Russian invasion of Ukraine and the first major war in Europe since WW II makes hard assets more attractive. Silver has a long history as a hard currency. 
• While silver often violated technical levels in the short term, the trend has remained bullish since the turn of this century.  

Last week, gold reached a marginal new all-time high at over $2070 per ounce. Silver tends to follow gold. Moreover, the silver-gold ratio has been trending lower since mid-December 2021. 

The chart shows gold’s price divided by silver’s price ({GCJ22}/{SIK22}). The ratio has made lower highs since 2022, dropping from 81.9:1 to the 75.9:1 level since December 15. 

Since silver is a more speculative metal than gold, the decline in the ratio signifies that investment demand in silver is rising.  

SLV is the ETF product that tracks the silver futures market

The most direct route for a silver investment is via the physical market. Bars and coins made of silver are a pure investment, but they are bulky. A 1,000-ounce silver bar worth around $26,000 weighs around 70 pounds. 

The most liquid unleveraged silver ETF product is the iShares Silver Trust ETF product (SLV). At the $23.87 level, SLV had over $14 billion in assets under management and trades an average of over 47 million shares each day. SLV charges a 0.50% management fee. The fund summary states:

SLV holds physical silver bullion. May COMEX silver futures rallied from $22.035 on February 3 to a high of $27.495 on March 8, a 24.78% rise. 

Over the same period, the SLV ETF rose from $20.34 to $24.90 per share or 22.42%. Silver SLV only trades during the hours when the US stock market operates; it can miss highs or lows in the silver market, which trades around the clock during the business week. 

Silver broke out to the upside, and all signs point higher. However, silver is a metal that tends to violate technical levels and spoof the market. It is critical to be cautious in the volatile silver market.