It would be so much easier if there was one optimal signal that we could all look out for. The nearest we get sometimes to the holy grail signal service is by being a contrarian against the retail traders’ sentiment. However, things like the COT report and the Gold/Silver ratio can add some more sophistication to trade ideas and when they all line up the probabilities are in our favour.
Weekly Commodity Analysis - SILVER
In the above chart, the Gold/Silver ratio (black) is compared to the price of Gold and Silver. By following a couple of simple guidelines, you can determine your bias in precious metals.
A positive bias to buying Gold exists when the Gold/Silver ratio is in an uptrend and Gold and Silver are both making higher swing highs and higher swing lows.
When the Gold/Silver ratio is in a downtrend and Gold and Silver are both in an uptrend as we see in the chart above, it is better to purchase Silver.
Next, I inspect what most traders are doing before recommending a buy or sell signal, since going with the majority means the position is likely to end up stopped out. The current ActivTrader sentiment indicator shows that 96% of retail traders on the platform are long Silver, so even though the intraday markets appear to be in a bullish silver environment, there is a very high probability that these retail traders get stopped out before any meaningful uptrend can happen.
The weekly chart for Silver shows that price has come down towards the 200-period moving average and that around the $21.50 price level there has been a build-up of support. In September 2021 the 20 EMA crossed under the 50 EMA confirming medium-term momentum was to the downside and as price action pushed to $25, these prices were rejected. In 2020 when the price was able to get back above the 20 & 50 EMAs there had been a continuation higher and this led all the way up to $30, so the fact that this most recent attempt failed is showing we’re in a different environment now to the one back in mid-2020.
If retail traders are loading up on their silver long positions, I am of the view that the weekly 200-period EMA will be tested first and maybe the $19.00 to $20.00 zone as that was the breakout levels in 2020. Old resistance should act as support.
With respect to the testing of the weekly 200-period EMA analysis, on the daily chart, we have seen a double bottom chart pattern appear in the past few months, which is a sign of a potential build-up of liquidity. These levels are often used by retail traders as stop-loss zones. Therefore, traders who are long sell out below the double bottom pattern. In dawn raids on the precious metals markets bullion banks are turning unallocated positions into physical contracts to comply with Basel 3 rules. With the sweep of the double bottom, a great number of retail physical holders will help convert precious metals derivatives held by the bullion banks into allocated and physical holdings, as the retail traders once again get squeezed out. The double bottom trade works just as well with double tops, so I foresee a move up to the $30 level once again once the banks have done all their business at these depressed levels.
Currently, CTAs tracked by TD Securities is showing that gold is being bought while silver is on the whole being sold. The trigger for a sell/buy signal in silver by these systematic programmes is $22.45/oz
Last Friday Fed member Waller talked about starting balance sheet runoff almost immediately after QE ends, which represents a greater hawkish change in tone. The CTFC Commitment of Traders report for silver shows that the commercials are net short but there was a tightening of open interest in this position. The commercial producers have been reducing their short position since November 22nd, which coincides with the drop from the most recent swing high. If we see these commercial participants start to increase their short holdings, I would like to see the silver price rise. Until then I am waiting to see another dip in silver.
The Eurodollar futures market is showing an inversion in the yield curve which points to problems for the global financial system in the coming years. This would lead investors to buy the highest quality liquid assets that they can get their hands on, which will include precious metals. If the Fed were to pull back from being hawkish into the March or May meetings this dovishness could result in a more bullish outlook for precious metals, as the markets are already talking of a policy mistake. Though raising rates is price setting the futures higher, so I would imagine the costs of goods, services and commodities which includes silver, would rise on an early rate hike too. Seems to be a win/win for precious metals whatever the Fed do next.
Currently silver is in a precarious place, with a near-term dip the most likely outcome (in my opinion). This dip, assuming some of the macro drivers present themselves at the same time, will also be a buying opportunity. Waiting for the Gold/Silver ratio to present itself in the optimum way for purchasing silver post the next dip, would be my signal to get long.