My recent position on silver was that it had become massively oversold.
That was a week ago, when the price of silver dropped from $14.65 to $13.97.
We’ve since learned that money managers almost doubled their net short silver futures position in the previous week. That strongly suggests that speculative shorting of silver from its latest high near $14.80 helped push the metal below $14.
But silver prices quickly recouped about half that loss in just a few days, suggesting that bargain hunters have stepped in, helping provide a price floor.
It gets better too.
The gold to silver ratio, one of the most important indicators we follow, just hit a multi-decade high. And when this has happened in the past, silver usually plays rapid catch-up to gold.
The extreme pessimism in silver is likely to help sow the seeds for a big silver price rally that could take many by surprise…
Why the Price of Silver Has Breakout Potential
The past week has seen the U.S. Dollar Index (DXY) give back over 130 basis points, dropping from 97.5 to 96.2.
In that time, the price of silver ran up by over 3%. Stocks remained volatile, giving back most of their gains, while bonds benefited from buying as investors sought shelter. The yield on the 10-year Treasury note dropped from 3.16% to 3.06%.
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Here’s a look at the dollar index’s slide over the last week…
Meanwhile, silver prices dropped down to as low as $13.87 in early morning trading on Wednesday (Nov. 14). By 8 a.m., it had recovered to $13.97, soon retook the $14 level, and eventually closed at $14.65.
It was a round trip that likely shook out more weak hands, leaving still fewer silver holders with conviction.
Then on both Thursday (Nov. 15) and Friday (Nov. 16) silver gained steadily as the dollar weakened further. By Monday (Nov. 19), silver stayed in a narrow range from $14.35 to $14.40 despite the dollar and another stock sell-off.
I think this price action along with the gold to silver ratio I mentioned earlier bodes well for silver prices going forward.
But there’s even more reason to be bullish on silver…
Why This Is Just the Start of a Silver Price Rally
Let’s look more closely at the DXY and where it may be headed next.
The DXY made a hasty retreat from its recent peak near 97.5. The latest drop is being confirmed by both the relative strength index and moving average convergence divergence momentum indicators, too. If the DXY is headed lower (and that’s looking more likely), my first target is 95.5, which is about the 50-day moving average. Next would be 94.5, which was previous support, then down at 93.5, which was the September low. In fact, that support goes all the way back to early June.
Take a look…
That kind of dollar sell-off would likely trigger strong silver buying.
Now, a closer look at silver.
Of course that mid-November dip was scary, but the bounce back was swift on robust buying. Silver needs to clear the $14.50 level to best its 50-day moving average, then $14.75, which has proven solid resistance since late August.
The momentum indicators seem to be confirming silver’s recent strength, as they’ve lately flipped upward.
Silver futures traders in recent months touched their most bearish levels in history. That sort of extreme could well be giving birth to a major rally.
And in the latest COT report, money managers’ net short position almost doubled recently. That big speculative bet against silver likely helped push silver below $14, according to Commerzbank.
Interestingly, Scotiabank’s November “Metals Matters” precious metals report commented that investors have turned to gold lately, as some economic data has disappointed. In fact, gold strength along with the dollar in October suggests precious metals could hold up even in the face of further dollar gains.
As for silver, Scotiabank’s analysts said, “Should gold prices extend gains and investor interest return, then silver would likely outperform gold’s rebound in percentage terms as it has a history of being more volatile than gold.”
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