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.
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.
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.)