Will Silver Crash to a 9 Year Low?

Silver has been out of love from investors since the market started its downfall in 2011. After peaking at $49.81 on 24 April 2011, the metal has been falling lower ever since, as the chart below shows.

Source: Admiral Markets MT5 Supreme Edition SILVER, Weekly - Data range: from 6 August 2006 - 22 October 2018, performed on 19 November 2018 at 4:05pm GMT

In fact, it's fallen so much it is now threatening to break to a new nine-year low - that is if sellers can take control of the market and break the $18.36 price level (highlighted by the blue line).

Will the level break, creating a full-on crash in the market? Or will buyers protect the level like they did in 2016 when the market rallied higher (the first bounce off the blue line)? Let's discuss the possible scenarios.The Case for a Crash in Silver

According to a recently published report by the World Bank, the recent decline in silver is likely to continue for the next 10 - 20 years. Silver has a strong industrial use in electronics, medicine, chemical production and energy. However, thanks to new technology, production methods have required reduced amounts of silver.

On top of that, silver is priced in US dollars. A rising dollar could pressure silver prices even lower. And, with strong growth in the US, investors are buying up US dollars in droves while dumping other dollar-related assets such as gold and silver.

The ongoing trade tension dispute between the US and China has certainly not helped the metal. As 60% of silver's annual demand comes for industrial uses, trade tensions can hurt production as demand dries up.

The Case for a Rally Higher in Silver

While the demand for silver may have dried up in certain sectors, there is one sector that could be 'explosive', according to David Holmes, senior vice president of German based refining group Hearaeus. Holmes, is expecting 'explosive growth' in silver to come from the auto-sector, as the world moves away from combustion engines.

According to Thomson Reuters GFMS, in its World Silver Survey 2018 edition, electric vehicles and hybrid-electric vehicles will account for more than half of all global automotve silver demand by 2040.

Source: Bullion Vault

If trade tensions between US and China could be resolved, this may also lead to more positive sentiment around global production, thereby increasing demand for the metal.

What about Silver in the Short Term?

Both scenarios above are fundamentally valid. However, production methods, demand, and turns in the economic cycle can take years to play out. Investors may analyse these types of scenarios and it could certainly pay off for traders to look at the longer term picture every now and again.

However, there are some interesting statistics for the silver market in the short term, that some traders could use to their advantage. Let's take a look.

The Seasonality of Silver

Many commodities, such as silver, often exhibit similar seasonal tendencies each year. One reason is because commodities are produced or harvested at specific times each year. Demand for some commodities can also increase at the same time every year (think about heating in winter!).

How about the silver market? Well, if we look at the monthly averages over the past 20 years there are some interesting results for shorter term traders:

Source: Equity Clock

We can see that silver tends to enjoy price rises in December (55% probability), January and February (both 70% probability). Of course, these are just statistical probabilities so there is a chance it won't happen.

However, many traders often look for a confluence of factors before taking a trade. If the silver market is slightly biased to push higher in December, January and February then the mere fact we are trading very close to silver's eight year low may result in some traders speculating on a rally higher off that level.

How Traders Can Take Advantage

The volatility of an asset tends to increase when trading around historical highs and lows. With silver trading around such levels this can represent strong opportunities for seasoned traders.

However, keep in mind that volatile markets can result in higher trading risks, so proper risk management and volatility protection is essential. As always, trading is about making decisions. Based on the information above some traders will trade to the long side, some will trade to the short side and some may even stay out. What will you be doing?

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