Traders find a silver lining
12/05/17

Stock traders who have gotten tired of the “low-volatility” story should chat with their precious metals counterparts, who watched their markets—especially silver—more or less grind to a halt throughout October and November.

At least stock traders have had a trend to enjoy. By mid-November, it seemed like any kind of directional move in silver might arrive around the same time as the next season of Game of Thrones (read: a long time from now). After peaking above $18 in September, December silver futures (SIZ7) sold off around 10% into early October before screwing into a textbook triangle pattern—a sideways consolidation of ever-tightening prices. For a while, it looked like silver would be worth around $17.25 permanently, and traders could all call it a day.

December 2017 silver (SIZ7), 6/8/2017 – 12/4/17. Triangle breakout

Source: OptionsHouse

But silver finally popped its cork last Tuesday (November 28) with a downside breakout that as of yesterday had taken the December futures from around $17.12 to $16.32 (-5%)—below the contract’s early October low and almost exactly to the support level implied by the August low. The next notable chart support point is the July swing low, almost $1 below yesterday’s level.

Given the absence of any identifiable catalyst or change in the silver supply and demand picture, is there any reason to think the current move is anything more than a short-lived diversion before the market goes back into hibernation?

The relationship between silver and gold may offer a clue. The two markets are highly correlated—as the chart below suggests—but they do have some variability.

December 2017 silver (SIZ7) and gold (GCZ7), 6/21/17 – 12/4/17

Source: OptionsHouse

And lately, silver’s relative weakness to gold has been increasing. In the past, exceptionally weak silver/gold ratios have accompanied some good buy points in silver—take note of the October 2008 and February 2016 lows on the following silver/gold ratio chart, for instance. The most recent silver down move pushed the silver/gold ratio below its July low, giving it an open shot at the February 2016 low. It’s possible that silver might need to weaken to the point that the silver/gold ratio tests its support level before a bottom is in.
Silver/Gold ratio, 7/14/2006 – 12/4/17

Source: quandl.com (data)

On the long side of the market, of course, is the relationship of silver and gold to the equity market. If a meaningful stock market break occurs—i.e., the type of move we haven’t seen in about two years—gold and silver may jump in a way that will leave unwary traders wondering what hit them. (For a refresher course, take a look at December 2015–February 2016.)

 

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