Silver - Losing Its Shine?
Updated
Silver commands value both as a precious metal and an industrial metal. Silver is often considered as a poor man's gold. According to the Silver Institute, Silver is used in solar cells (also known as photovoltaic cells which convert sunlight into electricity), electrical switches, and chemical-producing catalysts. Its unique properties make it nearly impossible to substitute and its uses span a wide range of applications. Every computer, handphone, cars, and appliance contains silver.
Near-term headwinds for photovoltaic manufacturing in China combined with a strong US Dollar are expected to weigh down on Silver prices in the near term. Our short-term outlook for silver is bearish. With a price rally over the past two weeks, we expect prices to retrace in the near term providing a compelling entry for a short position in Silver.
SILVER’S VALUE DRIVERS
Silver has been considered a precious metal for several centuries. However, in the modern economy, silver is valued as both a precious and an industrial metal. Silver’s industrial uses range from electronics, batteries, automobiles, dentistry, and photovoltaics among others. As such, nearly half of the annual worldwide demand for silver was from industrial uses over the past five years. In contrast, only 10%-15% of gold supply is used for industrial purposes.
SILVER’S INDUSTRIAL DEMAND
Photovoltaic demand particularly has been a major factor in recent years with the growing proliferation of solar power. Silver consumption in solar panel production grew 13% in 2021 and accounted for 22% of total industrial usage as per the Silver Institute.
China is the global leader in solar-panel manufacturing accounting for 74% of the module capacity and 85% of the cell capacity in the world according to the IEA. With manufacturing in China remaining muted in the short term due to COVID surge and related lockdowns, photovoltaic production demand over the short term is unlikely to influence Silver prices.
SILVER AS STORE OF VALUE
Silver has underperformed relative to Gold and Platinum this year. Both Silver and Platinum have outperformed over the past month and 3-month periods. Precious metals investments face strong headwinds as investors find relative safety in elevated US Treasury Yields. Although expectations are for the Federal Reserve to ease its rate hiking cycle going forward, that policy pivot remains unlikely anytime soon.
SILVER SUPPLY AND DEMAND BACKDROP
Fuelled by Silver’s price rally in 2020, supply rebounded in 2021 increasing 5% YoY. However, silver supply plunged into a deficit in 2021. This deficit was expected to widen further this year according to the Silver Institute as demand rises (+5%/1030.3 million ounces) was expected to outpace supply (+3%/1,101.8 million ounces).
However, macro backdrop of events this year, from rising inflation, COVID situation in China, to geopolitics, has adversely impacted the demand from the electronics industry leading to excess inventory. Additionally, reduced manufacturing production in China will also lead to lower demand for photovoltaic production. Falling demand, especially in the short term, will likely result in supply outpacing demand.
SILVER TECHNICAL SIGNALS & A PEEK INTO SILVER COT REPORTS
Silver prices rallied over the past two weeks breaching a resistance band ($20.5-$21.32) that has held since July.
Following this rally, RSI moved into overbought territory at 72.18. Additionally, on the 200d and 10d moving average (MA) we see a golden crossover forming. However, if we take a longer short-term MA (20d) to look at the larger uptrend that began on 14th October, the Golden crossover is far from likely to occur.
Moreover, the rally faced resistance at the 200d MA reaching a high of $22.38 which is 3.99% higher than the 200d MA on the day. The highest close was just 2.8% above the moving average on the day. Both these levels are within 2x standard deviation of the Implied Volatility of At the Money Options (31.01%) as seen on CME's QuikVol.
Nevertheless, the current rally does deliver promise as it confidently breached R1 of the pivot point indicator. This level of $20.95 now indicates a support level for the rally.
CME’s Commitment of Traders (COT) tools shows that despite the price increase over the past month, producers have increased the number of short positions from 20.7% to 24.3% on November 15th.
Managed money shorts have decreased from 32.4% to 17.7% while managed money longs have increased marginally from 26.7% to 28.2%.
SHORT SILVER FUTURES TRADE SETUP
SILZ2022 provide exposure to 1,000 Troy Ounces of Silver with a maintenance margin of $1,700 as of November 22nd. This provides a cost-effective way to get exposure to movements in Silver’s price.
Establishing a short position with an entry price at 221.18/OZ with a potential target at 119.88/OZ (1x standard deviation of IV of ATM option above the pivot point) by Dec 16th (two days after the next Fed meeting) could provide exposure to a short-term correction in the price of silver yielding 76.47% returns or $1,300. A stop loss at 1x standard deviation of IV of ATM option above 200d MA at $21.88 would protect against an unexpected rally resulting in loss of $700 or -41.18% providing a reward to risk ratio of 1.86. Alternatively, holding the position until the pivot point would lead to 98.82% returns or $1,680.
As the correction is expected to be in the short-term, December futures could provide superior liquidity.
SIZ2022 provide exposure to 5,000 Troy Ounces of Silver with a maintenance margin of $8,500 and improved liquidity in case of larger positions.
MARKET DATA
CME Real-time Market Data help identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/gopro/
DISCLAIMER
Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or particular needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of the future performance.
All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience.
Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk.
These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Mint Finance to any registration or licensing requirement.
Near-term headwinds for photovoltaic manufacturing in China combined with a strong US Dollar are expected to weigh down on Silver prices in the near term. Our short-term outlook for silver is bearish. With a price rally over the past two weeks, we expect prices to retrace in the near term providing a compelling entry for a short position in Silver.
SILVER’S VALUE DRIVERS
Silver has been considered a precious metal for several centuries. However, in the modern economy, silver is valued as both a precious and an industrial metal. Silver’s industrial uses range from electronics, batteries, automobiles, dentistry, and photovoltaics among others. As such, nearly half of the annual worldwide demand for silver was from industrial uses over the past five years. In contrast, only 10%-15% of gold supply is used for industrial purposes.
SILVER’S INDUSTRIAL DEMAND
Photovoltaic demand particularly has been a major factor in recent years with the growing proliferation of solar power. Silver consumption in solar panel production grew 13% in 2021 and accounted for 22% of total industrial usage as per the Silver Institute.
China is the global leader in solar-panel manufacturing accounting for 74% of the module capacity and 85% of the cell capacity in the world according to the IEA. With manufacturing in China remaining muted in the short term due to COVID surge and related lockdowns, photovoltaic production demand over the short term is unlikely to influence Silver prices.
SILVER AS STORE OF VALUE
Silver has underperformed relative to Gold and Platinum this year. Both Silver and Platinum have outperformed over the past month and 3-month periods. Precious metals investments face strong headwinds as investors find relative safety in elevated US Treasury Yields. Although expectations are for the Federal Reserve to ease its rate hiking cycle going forward, that policy pivot remains unlikely anytime soon.
SILVER SUPPLY AND DEMAND BACKDROP
Fuelled by Silver’s price rally in 2020, supply rebounded in 2021 increasing 5% YoY. However, silver supply plunged into a deficit in 2021. This deficit was expected to widen further this year according to the Silver Institute as demand rises (+5%/1030.3 million ounces) was expected to outpace supply (+3%/1,101.8 million ounces).
However, macro backdrop of events this year, from rising inflation, COVID situation in China, to geopolitics, has adversely impacted the demand from the electronics industry leading to excess inventory. Additionally, reduced manufacturing production in China will also lead to lower demand for photovoltaic production. Falling demand, especially in the short term, will likely result in supply outpacing demand.
SILVER TECHNICAL SIGNALS & A PEEK INTO SILVER COT REPORTS
Silver prices rallied over the past two weeks breaching a resistance band ($20.5-$21.32) that has held since July.
Following this rally, RSI moved into overbought territory at 72.18. Additionally, on the 200d and 10d moving average (MA) we see a golden crossover forming. However, if we take a longer short-term MA (20d) to look at the larger uptrend that began on 14th October, the Golden crossover is far from likely to occur.
Moreover, the rally faced resistance at the 200d MA reaching a high of $22.38 which is 3.99% higher than the 200d MA on the day. The highest close was just 2.8% above the moving average on the day. Both these levels are within 2x standard deviation of the Implied Volatility of At the Money Options (31.01%) as seen on CME's QuikVol.
Nevertheless, the current rally does deliver promise as it confidently breached R1 of the pivot point indicator. This level of $20.95 now indicates a support level for the rally.
CME’s Commitment of Traders (COT) tools shows that despite the price increase over the past month, producers have increased the number of short positions from 20.7% to 24.3% on November 15th.
Managed money shorts have decreased from 32.4% to 17.7% while managed money longs have increased marginally from 26.7% to 28.2%.
SHORT SILVER FUTURES TRADE SETUP
SILZ2022 provide exposure to 1,000 Troy Ounces of Silver with a maintenance margin of $1,700 as of November 22nd. This provides a cost-effective way to get exposure to movements in Silver’s price. Establishing a short position with an entry price at 221.18/OZ with a potential target at 119.88/OZ (1x standard deviation of IV of ATM option above the pivot point) by Dec 16th (two days after the next Fed meeting) could provide exposure to a short-term correction in the price of silver yielding 76.47% returns or $1,300. A stop loss at 1x standard deviation of IV of ATM option above 200d MA at $21.88 would protect against an unexpected rally resulting in loss of $700 or -41.18% providing a reward to risk ratio of 1.86. Alternatively, holding the position until the pivot point would lead to 98.82% returns or $1,680.
As the correction is expected to be in the short-term, December futures could provide superior liquidity.
SIZ2022 provide exposure to 5,000 Troy Ounces of Silver with a maintenance margin of $8,500 and improved liquidity in case of larger positions.MARKET DATA
CME Real-time Market Data help identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/gopro/
DISCLAIMER
Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or particular needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of the future performance.
All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience.
Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk.
These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Mint Finance to any registration or licensing requirement.
Trade closed: stop reached
On November 22nd, we published a case study looking at a potential short position on CME Micro Silver futures with an entry at 221.18/OZ, a stop loss at 221.88/OZ and a target of 19.88/oz. This potential trade ended up being stopped out on November 30th. Our rationale for the case study was based on limited PV demand for silver due to COVID curbs in China. In addition, we pointed to a high treasury yield that could lead to a flight to safety towards US Treasuries instead of precious metals.
Looking back, The COVID situation in China continued to worsen as cases hit a record high. This initially led to declining silver price as the position momentarily entered into profits. Amid headlines that China was looking to loosen COVID restrictions in the country following mass protests, Silver price rallied on November 25th.
Following this, on November 30th, Fed Chair Powell stated that the Federal Reserve might look to slow the pace of rate hikes starting in December. This provided a further boost to the wider market as well as precious metals which led to a rally of 4.47% in silver that broke through our stop loss.
Silver's 10-day moving average broke above the 200-day moving average definitively and this level now acts as support for the price.
The case study got stopped out at $21.88 leading to a loss of $700.
Full Disclaimer - linktr.ee/mintfinance
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.