Silver Continues to Dull
Thursday, December 15, 2011
Europe continues to be the focal point of traders everywhere. The recent wave of bank downgrades, while not a surprise for anyone, continues to be a black cloud hanging over the stock and commodities markets. Demand for Silver could suffer further setbacks, as investment demand has been a key driver of the physical market. Technically, the most recent downside breakout suggests that the market could continue to drop. Given the bearish fundamental and technical outlooks, some traders may perhaps wish to consider entering into a bearish strategy. Given the fact that Silver can make wild, violent swings, some traders may opt to enter into a bear put spread, for example, buying the February Silver 28 put and selling the 26.5 put for a debit of 0.50. The trade risks the initial cost of $2,500 and has a maximum profit of $5,000 if the underlying March futures contract closes below 26.50 at expiration.
Fundamentals
Silver futures were one of the big losers amidst the panic selling in commodities yesterday. The metal fell almost 7.5%, falling to the lowest closing price in ten months. Many traders have begun to question whether or not the bull market has ended for precious metals. The metal is certainly in a technical bear market, falling over 40% from April highs and exceeding the 30% that defines a technical bear market. The uncertainty over the state of Europe continues to set the tone for trading on a daily basis. The longer the European debt crisis drags on, the more apparent it is that the egos of the leaders of member states may continue to derail any meaningful accord. This threatens to have a large negative impact on the global economy, slowing demand for commodities. As a result, Silver's industrial demand could continue to slump. As Europe continues to procrastinate, the odds of the Euro currency unit seeing its demise continues to increase. The stronger US Dollar could slash investment demand to the same degree that slow economic growth has plagued industrial demand.
Technical Notes
Turning to the chart, we see the March Silver contract breaking out below support at the 30.00 level. There is also confirmation of a breakout out of the triangle pattern, which suggests that prices could test the $25 level on the downside. As noted earlier, yesterday's settlement price was off 40% from the highs recorded earlier this year. Prices have not yet hit oversold levels, suggesting the sell-off may have legs.
Rob Kurzatkowski, Senior Commodity Analyst
