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Morning Briefing

How bearish is Silver

SILVER TO TEST 13, REBOUND TO 19

03-Nov-14; Silver Spot $16.04

Precious metals complex, including Silver, has been in strong downtrend since 2011, falling 68% from the top near 51. The decline may come to an end near $13 and then bounce towards $19 in the coming 6 months.

To project price probabilities over next few quarters is a tough task in the current macro-economic environment and central bank actions against precious metals. Still, here we examine the probabilities of the price trajectories in the attached JPG chart. Technically, the prices have broken below a recently concluded bearish consolidation, and its target is likely to play out in full.

ANTICIPATED PRICE PATH

  1. The immediate target of the move is $15.00 and $14.60. The current prices are close to these targets, and there is high probability we would see this targets achieved soon enough.

  2. Below $14.60, which is also the impulse bottom for the rally beginning early-2010, a further sharp and steep fall should be seen. A cluster of very long-term trend supports exist around $12.90-13.00. We expect these trendlines to hold well for the foreseeable future. See the Most-Preferred path as shown in the charts.

  3. $19 is the immediate important pivot Resistance on the upside. Sentiments would turn bullish above this level or be bearish below these levels. We expect prices to remain below $19 within the period under consideration. 4. However, a move above $19 (if seen) would invalidate our current bearish expectations, negating the anticipated fall to the $13 target. See the Alternative path as shown on the charts.

ANTICIPATED FUND FLOWS

  1. The end of the year is likely to see some accelerated selling on part of funds offloading and rebalancing for New Year. It is possible that this portfolio allocation overhang will carry over to January 2015 also.

  2. We are likely to see some shifts in allocation towards precious metals at lower prices especially by long term investors and funds. This portfolio shift, coupled with the seasonal bottom in mid-January could see a bounce happening in mid or end of January extending into March. The extent of the move will depend on the news flows regarding inflation and central banking actions at that time.

  3. Given the fact the precious metal complex are already trading well below their marginal cost of production (estimated near $20-25), it is highly unlikely that we will see a prolonged bear market below these levels. Hence, although our price target of $13 extends below the cost of production, we do not expect the markets to remain at very low levels for a very long time.

  4. The wildcard is the mine production and the mines themselves. If the price remains below cost of production for extended times, or mines close down due to un-profitability or feasibility, it would be bullish for prices and could trigger stronger rallies.

CRITICAL ASSUMPTIONS

  1. We expect the inflation expectations to remain low over next several months, aiding the near term decline in prices.

  2. We expect Dollar index to reach 90 in next few months. Strengthening Dollar index should keep precious metals under pressure.

  3. We expect Central Banks to continue to buy Gold (which also influences Silver) at present volumes, and not in increased volumes. The current purchase volumes may not prevent the immediate fall in prices.

  4. We do not expect the longer term Support trend line coming up from 2002-2004 and 2009 to break. Hence, we assume prices may bounce from $13.

CONCLUSION

Silver may decline toward $13 in the near term, consolidate sideway to form a bottom for a while and then bounce towards $19 in the coming 6 months.
 
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