Article / 03 March 2017 at 9:19 GMT

What just happened to silver?

Head of Commodity Strategy / Saxo Bank
  • Rate hike expectations are one reason for weaker silver
  • Gold the last two rate hikes reacted negatively in the run-up, then rallied 
  • Silver can fall to $16.70/oz. without changing the longer term bullish sentiment 
Thai Silver
The price of silver dropped recently, but works of silver might be unaffected. Photo: Shutterstock

By Ole Hansen

Silver slumped by 4% yesterday. It ran out of oxygen after having spent the past four days failing to break higher. Renewed focus on a March FOMC rate hike and weakness across the industrial metal space turned traders into sellers and once $18.30 was broken the floodgates opened.

We mentioned in our latest precious metals update yesterday that the sector was at risk of a correction ahead of March 15 where a rate hike is firmly back on the table. 

On gold we observed the following behavior around the previous two rate hikes: The last two times the FOMC raised rates gold reacted negatively in the run-up to the announcement only to rally afterwards. In December 2015, gold lost 2% during the month leading up to the hike, only to rally by 2.6% the following month. The before-and-after reaction to December 2016 was a drop of 5% (Trump's election win playing its part) followed by a 3.4% rally. 

Silver found resistance this week after retracing 50% of the July to December sell-off. The correction yesterday initially targeted $17.72 which was reached in one big sweep. 

Silver since last summer
Spot silver with retracement
 Source: SaxoTraderGO

Silver has been trading within a one dollar wide uptrend since December and throughout February it rallied more than one dollar without looking back. 

This momentum attracted hedge funds buying during eight consecutive weeks and during this time the net-long rose much faster than what was seen in gold. This eventually left silver exposed to a bigger correction than gold. 

Gold and silver speculative positioning

Source: Bloomberg, Saxo Bank

The increased focus on a March 15 US rate hike combined with a market increasingly in need of a correction kicked off the move yesterday. Gold had already been in a corrective mood the past week after being rejected at the 200-day moving average at $1,261.

In our update yesterday we were looking for support at $17.72/oz. but having hit that level in one big sweep further downside risks persists from funds in need to reduce exposure further. 

Using retracement levels silver can fall all the way back to $16.70/oz. without changing the longer term bullish sentiment in the market. Before then however there will be a strong focus on $17.37/oz as a rejection at this level would indicate that this was 'just' a weak correction within a strong uptrend. Nervous trading lies ahead. 

Spot Silver
 Source: SaxoTraderGO

— Edited by Clemens Bomsdorf

Ole Hansen is head of commodity strategy at Saxo Bank

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