SILVER
(UPDATED AS OF THE U.S. CLOSE ON THURSDAY, JULY 25)
(UPDATED NIGHTLY SUNDAY THROUGH THURSDAY)
Note: Just posted on July 26 - the latest Commitment of Traders Report
TECHNICAL FORECAST: Silver price is precarious as indicators turn negative - silver still remains vulnerable to liquidation by an unusually high number of long speculators.
Summary: The silver price fell back slightly today, the September contract closing at $4.855 from $4.86 yesterday.
The short term indicators remain negative. The indicators are not yet oversold and suggesting further decline ahead.
The open interest* continued to fall, now at the lowest number in a month at 92,992 contracts indicating that although some long speculators have liquidated there still remain an an estimated 25,000 contracts held by long speculators who entered the market in recent months.
Last week's report showed the number of long speculators in the market at extremes, representing 79% of the market as of the latest report (July 23).
The silver price has found support in the area of $4.80, so a significant break below that area could send the silver declining even more sharply. We guess there are probably a lot of speculators waiting to see that support area broken before liquidating.
We have to believe that the unusually high number of speculators who bought silver in recent months are getting nervous as they watch the silver fall sharply, after weeks of being stalled in a limited range. Most likely there are a lot of margin calls still outstanding, which will force many of them to liquidate, adding more fuel to the steep drop.
Although the silver market usually goes in the same trend as the gold market, unlike the gold market it is not considered a "safe haven" as some investors think of the gold market. Silver is also an industrial metal and if the economy slows down, the silver is likely to have fewer buyers.
Demand for silver has lessened with the slower economy, particularly the demand for film use, one of the biggest uses of silver in the U.S., hurt by the increasing switch to digital cameras. Imports into Japan, one of the world's large silver users, are down from last year as well.
As of the last report (July 23) long speculators represented 79% of the total New York market (see below). The silver market is vulnerable to liquidation since there are so many more of them than short speculators (only 10% of the market) who might give the market a boost by short covering. Further, there is the potential for short speculators to sell into the market as they usually do if the price weakens.
The unusually high number of small long speculators now in the market (over 28,000 contracts as of July 23), adds to the market's vulnerability. Small speculators are more sensitive to margin calls.
The extent to which long speculators dominate the market now is unusual. Theoretically, the futures market exists so that both commercial (industry) interests can buy and sell contracts to meet their needs - speculators are also encouraged. However in the silver market now, the proportion of speculators to industry buyers seems out of balance as industry buyers account for only 16% of the market while speculators who bought the silver for speculation represent 79%.
The outcome should be an interesting lesson in what happens when speculators go against industry insiders to this extent.
The silver price is above the $4.80 area where it twice found resistance before. A sustained rise would be positive. The silver has also been influenced by the recent strength in the gold price and by recent weakness in the U.S. Dollar.
The latest Commitment of Traders Report (as of July 23) shows a continued net long position by speculators, now a lopsided 79% LONG to 10% SHORT, an extremely high position for long speculators and extremely low for short speculators (vs. 82% long to 10% short last week).
At the same time, as of July 16, industry insiders (commercial interests) held an opposite position, 16% long versus 85% short, an extreme position and a good indication that the industry is not bullish on the silver price.
(Average open interest in the past decade was mostly between 75,000 and 115,000 open contracts.
Since silver is sometimes considered an industrial metal (as well as a precious metal), it is likely to affected by the slowing economy and the falling stock market. The obvious worldwide slowdown is another factor contributing to silver's decline.
Both the longer term technical factors and the fundamental supply and demand factors are extremely bearish. We have included silver on our "Speculators Only" page since July 2000 and we continue to keep it there.
There are so many supply and demand factors in the silver market that we cannot hope to analyze them all, except to say that the price should speak for itself. Fundamentals remain poor, lots of supply with miners increasing production, probably to take advantage of the price before it weakens even more. Mexico, one of the world's largest producers, has almost consistently increased its production.
There are reports from Eastman Kodak of film sales declining. Film is one of the biggest users of silver in the U.S., so with declining film sales, there is less demand for silver.
The production costs in Mexico and South America are reported to average between $3.50 and $4.00 an ounce or less, a long way under the present price, so we are not likely to see reduced production because of the present low price, still profitable for many producers.
Declining or rising prices in the Gold or Platinum markets usually influence the silver market.
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SILVER - SHORT TERM INDICATORS
(UPDATED AS OF THE U.S. CLOSE ON THURSDAY, JULY 25)
Stochastics.................Declining under neutral
Relative Strength...........At 34 from 35 yesterday
Parabolic Time/Price Index. Changed to declining trend July 16
Momentum....................Declining under neutral
MACD........................Falling under neutral
Commodity Channel Index.....Declining toward low levels
40 day moving average Under the average - average line is level
The indicators above remain negative.
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