Silver Makes A Comeback

The nearby COMEX gold futures contract put in a bullish key reversal pattern on the daily chart on July 21. September COMEX silver futures had declined to a low of $18.01 on July 14, and silver held above the July 14 low on July 21 when gold hit its most recent bottom. Since then, silver has appreciated more than the precious yellow metal.

Silver is a highly speculative market, and its outperformance indicates that investors, trend-following traders, and speculators are moving capital into precious metals. At the end of last week, the September silver futures contract was near the $20.70 per ounce level, considerably higher than the mid-July low. The trend is always your best friend in markets, which turned higher in the silver futures arena.

Silver recovers and outperforms gold

Gold futures put in a bullish key reversal pattern on July 21. 

The December COMEX gold futures price rose from $1,696.10 on July 21 to the $1815.50 level on August 12, a 7.04% gain. 

Over the same period, COMEX September silver futures moved from $18.01 to $20.698, a 14.93% gain around double gold’s percentage increase.  

Silver mining shares have done better than the silver futures- Another bullish signal

The GX Silver Miners ETF product (SIL) owns a diversified portfolio of the leading silver mining shares. 

The chart shows the move from $22.97 to $26.70 over the period, a 16.2% gain. The ETFMG Prime Junior Silver Miners ETF (SILJ) portfolio holds shares in the top junior silver mining companies. 

SILJ rallied from $8.36 to $10.25, or 22.6%. Mining is a leveraged business, and shares tend to outperform silver’s price on the upside and underperform when silver declines. Junior companies offer more gearing than senior miners. The recent outperformance validates silver’s rally as it indicates that investors and speculators have allocated more capital to the silver market in anticipation of higher prices. 

The bonds recovered, and the dollar index fell, supporting silver and gold

Silver and gold fell as interest rates rose and the US dollar index moved to the highest level in two decades. Over the past weeks, bonds recovered, and the dollar index declined, setting the stage for the precious metals recovery. 

The chart of the September US 30-Year Treasury bond futures contract highlights the rally from 131-01 on July 16 to over the 140 level at the end of last week. The bond futures fell to the lowest level since 2014 before bouncing. Falling bonds and rising interest rates weigh on silver because it increases the cost of carrying inventories, and higher yields attract capital to fixed-income instruments. 

The nearby September dollar index futures contract reached 109.14 on July 14, the highest level since 2022. Since the mid-July high, the dollar index has made lower highs and lower lows and was at the 105.510 level on August 12. The dollar is the world’s reserve currency and the benchmark pricing mechanism for most commodities, including precious metals. A strong dollar tends to be bearish for raw material prices as it causes them to rise in other foreign exchange instruments. A falling dollar is often bullish for silver, gold, and other commodity prices. 

Levels to watch in the silver market

Since reaching a peak at $30.16 per ounce in February 2021, nearby COMEX silver futures have made lower highs and lower lows, with the bearish pattern leading to the mid-July $18 low on the continuous contract.

The chart shows that the $18 level now stands as critical support. Breaking the bearish trading pattern since early 2021 requires a move above the first technical resistance level at the May 2022 $22.41 high. Above there, resistance levels are at $27.32, the March 2022 high, $28.68, the May 2021 peak, and the February 2021 $30.16 high. 

Silver can surprise and even shock market participants when the price decides to move 

Silver is a futures market that tends to violate critical technical levels, experiencing fast and furious moves. The price dropped from nearly $19 in February 2020 to below $12 in March 2020 when the global pandemic gripped markets across all asset classes. Silver recovered and was above the $19 level by July 2020, reaching over $30 per ounce. 

The silver market can also experience long periods of price hibernation and slumber. From the mid-1980s through 2004, the price was primarily rangebound between $4 and $6 per ounce. While I do not expect a return to those levels, silver can look very bullish on rallies and extremely bearish when it corrects, causing market participants to exit risk positions on the long and short sides. 

I am bullish on silver, but the price needs to end the bearish pattern since the February 2021 high. The economic and geopolitical landscapes favor the upside in August 2022. Market participants require technical validation before buying or selling can create a significant trend in the volatile metal. The recent recovery is a start, but silver needs to follow through on the upside over the coming weeks and months to excite the market and cause sentiment to turn bullish. 

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