Losing Its Luster
Fundamentals
Silver prices have been hampered by the threat of a delayed global recovery on two fronts. As a precious metal, the prospect of lower than expected inflation in the near term has weighed heavily on the group of commodities due to lower investment demand. Investors have instead chosen treasuries as the safe haven vehicle of choice in the near future because of the general bearishness in commodities of late. Slow conditions in manufacturing of electronics products have also made Silver unappealing as an industrial metal. The fall in base metal prices of late has accelerated the slide in Silver prices, which have fallen more sharply than that of Gold. India has doubled it import duties on Gold and Silver in an effort to encourage recycling of the metals domestically. Indian demand for precious metals may fall by up to 25 percent for 2009. Import demand may drop by 45 to 50 percent according to some local market observers.
While the inflation, industrial and jewelry demand outlooks for Silver remain bearish in the near-term, investor sentiment in the US has not waned to this point. The iShares Silver Trust has not shown any material decline in holdings from all-time highs, indicating that investors may remain bullish over the long haul. Silver is generally seen has having more upside potential than Gold in the long run due to the overall tightness of the market. The weakness in equity and commodity prices has pressured the metal in recent weeks, due to the lowered inflation forecast. Gold and Silver prices may eventually detach themselves from the overall commodity markets if the economic pessimism of late turns to panic. In the long run, precious metals may prove to be a wiser investment for defensive traders than government debt due to the rampant printing of money by the US Treasury. The question is when that will happen. Current indications suggest it make be later rather than sooner.
Trading Ideas
The technical outlook and near-term fundamentals for Silver can both be seen as bearish, suggesting traders may wish to be short the market. However, longer term fundamentals suggest a positive bias for the market. For this reason, traders may opt to take a more conservative approach and enter a bear put spread with limited risk. One such spread entail buying the September 1250 put (SIU912.5P) and selling the September 1200 put (SIU912P) for a debit of 0.20, or $1,000. The trade risks the initial invest for a maximum profit of 0.30, or $1,500 if the September contract closes below 12.00 on the expiration date. Traders could also opt to exit the trade at 0.40 prior to expiration for a potentail profit of 0.20, or $1,000.
Technicals
The September Silver chart remains bearish near-term after breaking minor support near the 13.00 mark. Prices have also fallen below the 68.2 retracement level from April lows, suggesting prices may be coming down to test support at 12.00. Longer term, Silver has broken the uptrend line formed by the November and April lows. This suggests that prices may begin to form a new downtrend or trade sideways for the foreseeable future.
The 20-day SMA recently closed below the 50-day average and is closing in on the 100-day, both of which can be seen as bearish.
Rob Kurzatkowski, Senior Commodity Analyst
