Silver Testing Multi-Decade Support
Last week (6/25/2018-6/29/2018) we provided an update on the important test that is being witnessed in the gold market above $1,235 per ounce, as short-term traders who are selling following the failure at $1,300 in May are being challenged by new buyers now entering the market.
It should come as no surprise then given the magnitude of goldâs position that its cousin â silver â finds itself in an equally important test, albeit notably different from a technical perspective. Let us examine silver in some depth then.
For the week in sum, silver fell by $0.26 cents or 1.6% to close at $16.20 as of the final trade on the New York COMEX on Friday afternoon.
Silver Long-Term Perspective
The most important facet of the silver market to be aware of is that there is a valid and rising long-term trend of buyers that exist dating back all the way from 2003. This is visible above in the magenta color.
Note how a single linear trendline can be drawn from the 2003 low at $4.50 per ounce, connecting the crash of the 2008 low at $8.60, through the 2015 low again at $13.65 per ounce, and rising still toward $15.60 today. When we observe such a clear and long-term trend of buyers stepping in at higher and higher prices every several years, this trend should be respected until proven otherwise.
With the price of silver closing at $16.20 for the week, we can say that from the long-term perspective, silver is challenging the vicinity of this multi-decade rising trend presently. If the trend is to remain valid, buyers should be showing up over the next several weeks above $15.60 to maintain the integrity of this rising pattern.
On a Successful Trendline Test
It is important to comprehend the ramifications of a long-term trend test such as is being witnessed in silver presently. What will a successful low forming above $15.60 mean for the silver market? Primarily, it will mean that silver is forming a price base, from which higher levels can be expected to emerge over the years ahead. Note that a successful test of the trendline does not tell us anything about the speed by which silver may begin rising.
Silverâs long-term trend of higher buying is advancing by less than $1 per year, so it is possible that the market will continue on a slow and steady march higher in a similar manner over the years ahead. Then again, a successful test of the trendline may also open up a more rapid advance â similar to what was observed from 2008 â 2011 when silver prices rose over 400% from their lows at $8.60 to nearly $50 within three years.
The point is that â from a technical basis â silver will be forming an important low in the present price range if it can again see buyers emerge on this trend of rising support which has held since 2003. The trendline now comes in at $15.60 and rising slightly each week. Other forms of analysis will be required to gauge the upward potential â but a critical low is indeed attempting to form.
On a Failed Trendline Test
It is equally important for investors to grasp what the significance will be for silver should the price fail to see buyers show up along the long-term rising trend over the next several months.
First, what would a trendline failure not mean? A failure would not mean that the silver price must collapse. Think about this: silver had already fallen by over 70% from the peak in 2011 near $50 down through the bottom in 2015 at $13.65. For a commodity which cannot go to zero to have fallen by over 70% implies that the largest majority of the price risk has already been eliminated.
The collapse in silver has already occurred. Buyers now have some degree of certainty that another 70% decline will not occur again. What, then, would a long-term 2003 â 2018 trendline failure mean? It would simply mean that from a technical analysis standpoint, no expectation of a strong rising price should be expected at least for the next several years.
The price could move sideways, or decline slightly, or even rise somewhat below the broken trend. But if the trendline support at $15.60 were to fail over the coming weeks and months, it would alert us that the series of buyers who had been scooping up silver at higher and higher prices every year since 2003 were no longer present in the market.
Fundamental Market Drivers
We could make many fundamental arguments as to why silver prices should rise over the coming years, such as increased demand due to a weakening dollar, or increased demand due to widening industrial usage, etc. These arguments may remain true. However, the failure of a rising technical trend would consider these points, and add that perhaps mine supply from base metal byproduct will also expand over the coming years, or maybe investment demand will be weaker than expected.
Regardless of the cause, if a rising long-term trendline fails â this will be an indication that silver is not prepared to sharply rise in price for a number of years.
Technical analysis seeks to consider all known fundamentals and to arrive at the single data point which matters most to investors â price. By studying price trends, we can eliminate much of the debatable rhetoric which can appear on both sides of the investment spectrum and focus on what ultimately matters most: the price at which we must buy or sell.
As of the time of this writing, silver is less than $0.50 cents away from testing a visible trend of increasing buying which has appeared every several years since the lows of 2003. This is a critically important trend for the long-term support of the market. A successful test of the trend opens up the path for an important low to form above $15.60 into the second half of 2018, and for silver to begin rounding up and into another period of advancing prices over the years ahead.
Conversely, a failure to hold above $15.60 for any meaningful period of time throughout the remainder of 2018 would alert us that increasing buying support, which had existed since 2003, is no longer present in the silver market. A failure would thus open up the prospect of a range-bound or declining market for years into the future.
Silver had already fallen over 70% from its peak in 2011 down through 2015 lows, so while an advancing market may or may not emerge over the remainder of 2018, we can say that a significant percentage of the price risk has likely been eliminated from the silver market at this juncture.
Christopher Aaron
Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000's. He began his career as an intelligence analyst for the Central Intelligence Agency, where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is provided as a third party analysis and does not necessarily matches views of Bullion Exchanges and should not be considered as financial advice in any way.
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