Silver has continued to see concerted selling pressure as price action remains trapped within the confines of the bearish channel. The past few days has seen price action trending strongly towards the upper channel constraint which now threatens a breakout of the medium term bearish trend. However, the question remains as to whether this is a definite breakout or simply a dead cat bounce ahead of the Fed potentially normalising interest rates.
In particular, the metal could potentially be facing a relatively large rout as the US economy continues to gear up for a range of monetary tightening. The risk of the Fed normalising rates was always ever present but as we move towards sustained economic growth and job gains it becomes relatively clear that the central bank will need to take action sooner, rather than later. Subsequently, the market is likely to focus upon the near term risk that a cycle of potential interest rate hikes poses.
Any such move by the Fed would potentially send Silver reeling from its current level and forward forecasting shows that 75bps of hikes to the FFR, over the next year, would see the metal trading around the $14.00 an ounce mark. However, that risk might yet to be reflected within the Silver futures curve which is still showing rising prices throughout most of 2017 and 2018. Subsequently, if the Fed does indeed embark upon an adventure it could lead to the air escaping rapidly from the balloon which is currently financial markets.
Fortunately, the one fundamental factor which appears to be holding relatively static is the industrial demand for Silver. Physical silver demand continued to soar throughout most of 2016 which bodes well for the overall price direction and may be what much of the futures curve is based on. However, this ignores the impact of the waterfall effect as large institutions, such as JP Morgan, seek to continue floating derivative paper to ensure the metal remains depressed. Subsequently, it’s relatively unlikely that any of us will see a fair quote on COMEX any time soon.
Ultimately, Silver is in for a rough few months ahead as the volatility is likely to be fairly severe when the Fed tightening cycle eventually commences. That rate hikes are coming is largely inevitable, especially given some of the gains in inflation and the tightening of the job market, so it is imperative that position holders assess their reaction now before the madness of a ‘live’ FOMC meeting arrives.
The rally in equities had stolen much of the speculative demand from gold, and any pullback promised to send investors running back into gold. This is happening at this very moment, explains Brien Lundin, editor of Gold Newsletter.
Coincidental to all of this, we’ll soon see the end of two events — the Chinese New_Year and the currency illiquidity crisis in India — that have severely depressed physical gold demand.
In fact, the gains we’ve seen so far in gold have come without the aid of the world’s two most important sources of physical gold demand. If these markets return and join with Western speculative demand, then we could see fireworks in gold.
I_f we get any kind of a rally in gold going forward, we can also expect silver to outperform. So we would do well to be positioned in high-quality silver stocks going forward. Two of our portfolio holdings deserve mention:
Great Panther Silver (GPL) is one of our longest-standing silver recommendations, with a history of greatly rewarding our readers in a bullish silver environment.
The company is about to take a major step forward with its purchase of the Coricancha Mine in Peru. This addition could boost its annual production by over 70%, beginning next years, and the market has yet to factor this into its projections. This makes Great Panther a strong buy.
Silvercorp Metals (Toronto: SVM) is also in the running for one of our oldest silver recommendations, and it has also spun out life-changing gains for our readers during silver rallies. It may be ready to do so once again.
The company just announced that 2016 exploration at its LMW mine in the Ying Mining District in China have outlined significant new high-grade vein structures.
Simply put, these new veins show the typical high-grades and strike extent that have generated tremendous cash flows for Silvercorp in past silver rallies … and even when silver prices have been depressed.
As a result, the company is cash rich and, given its recent news flow, rededicated toward getting the market’s attention. In the past, this has translated into quite exceptional share price gains. In short, Silvercorp is a buy.
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