Silver selling off heavier again after drop in August – bulls have to wait for their chance

September 24, 2020 09:30

Silver saw a rough start into the third week of trading in September, dropping by more than 10% on Monday the 21st and, thus, echoing the 15% in August, with the little brother of Gold dropping short-term below the 24 USD mark per ounce.

Among traders the questions arise: "Will we see an even deeper correction in the days ahead?" and "Is the mid-to-long-term bullish picture still valid?"

Despite recent bearish action: Silver ETF sends bullish sentiment signs

To answer the first question "Will we see an even deeper correction in the days ahead?": while we don't have a crystal ball and can't answer that question for sure, technically the risk of an "ABC"-pattern and, thus, a push towards and below 23.00 USD, probably to as low as 22.00/22.30 USD remains an option.

That's probably especially true if the correction in equities continues since Silver, due to its higher risk sensitivity and also its bullish outperformance since the March lows, could see heavier selling pressure resulting out of a de-leveraging and meeting (equity) margin calls.

But before we get too pessimistic: the latest ETF's Silver holdings fared their biggest weekly decline in a year, after reaching an all-time high in August.

That's noteworthy as this development, within the recent bullish consolidation, shows that:

  • Some weak hands grew impatient over the past weeks
  • The weaker start into the week with the quite aggressive move on the downside was probably a "shake out" in first place
  • There are increasing chances of Silver having found a bottom
  • There are also increasing chances of a near-term bullish stint

This brings us to the second question, "Is the mid-to-long-term bullish picture still active?": as you may have guessed: we remain bullish on precious metals, especially for Silver.

The reason for our overall bullish bias is that the fundamental picture hasn't significantly changed over the past weeks: while the growth of the FED's balance sheet stalled around 7 trillion USD for nearly two months now and FED chairman Powell didn't signal an imminent adjustment either in the scope or scale of their QE program at the last FED meeting with recent bearish momentum in Equities having accelerated, the US central bank has to rather sooner than later to step in again.

This might be especially true, especially considering the following key points:

  • There has already been provided liquidity from the FED for smaller-sized corporations
  • Smaller corporations haven't profited that much from the recent run to new highs among US equities and bigger corporations
  • Democrats and Republicans are having trouble agreeing on another Corona relief package.

In general, this is a still favorable outlook for Gold, but, most likely, especially for Silver with the Gold-Silver-Ratio having reached nearly 80 to 1 again with the historic ratio being around 50 to 60 to 1.

That delivers bullish outperformance potential for Silver over Gold, even though both remain bullish.

How should you trade Silver in this environment?

Technically and short-term, we consider the picture in Silver bearish with an increased likelihood of a test of the region around 23.00 USD, probably to even lower, around 22.00/22.30.

Should we get to see Silver bulls recapture 27.50 USD before such a bearish stint lower, an increasing net long position in Silver futures could initiate a very bullish stint, pushing the metal quickly and dynamically towards 30 USD and even higher.

Source: Admiral Markets MT5 with MT5SE Add-on Silver Daily chart (between April 29, 2019, to September 23, 2020). Accessed: September 23, 2020, at 07:30 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015 the value of Silver fell by 12.8%, in 2016, it increased by 13.0%, in 2017, it increased by 6.4%, in 2018, it fell by 10.0%, and in 2019, it increased by 15.7%, meaning that in five years, it was up by 13.5%.


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