- Silver has rallied largely unchecked so far in 2017, rising briefly above DTL resistance from the July 2016 high.
- But it appears this move was too much, too soon after prices corrected sharply lower last week.
- For now the stochastics imply short-term sentiment has weakened. Prices have broken below support from the 20/200 DMAs around $18.00 per oz.
- The longer lower shadows on the recent candlestick formations imply good dip-buying interest around $17.80 per oz, however.
- Further support is expected around $17.50 per oz from the 40 DMA and should be reinforced by the 55 and 100 DMAs at $17.20.
- There are two short-term MAs poised to cross above longer-term MAs, which indicates silver could be entering a bull market.
- Successful clearance of DTL resistance from the July 2016 high would target resistance towards the November high of $18.98 per oz.
Silver prices seem to be underpinned by weakness in other markets and because of a pick-up in geopolitical tensions after North Korea fired four ballistic missiles into the Sea of Japan.
The AU/AG ratio jumped to 70:1 last week from a recent low around 67:1 due to short-term risk aversion. But the ratio remains below the reading of 72.1 from the start of the year, reflecting the overall strength of industrial commodities.
Net length among Comex speculators rose a further 7,406 contracts or 8% in the week to February 28. It has climbed consistently this year and is up by 36,512 tonnes or 62% so far in 2017. We expect the net length to rise alongside prices amid higher risk aversion. Still, we continue to think that the pace of net long accumulation will slow compared with gold because silver tends to have a higher correlation with risk assets.
Investment demand has proven mixed recently:
- ETF holdings declined by 2.8 million oz to stand at 644.8 million oz (basis the funds we monitor) on Friday following recent liquidation from the US-listed iShare platform. But holdings stand just 4.4% below their all-time record of 674.4 million oz, reflecting the bullish long-term outlook among investors.
- But higher prices have had a negative impact on retail investment demand. American Eagle coin sales totalled 1.25 million oz in February, down from 5.12 million oz in January. Accumulated sales were down 40% year-on-year in the first two months of 2017.
Industrial demand appears robust. Silver demand from the photovoltaics industry will rise 11% this year to a record high of 83.3 million oz, according to the latest Interim Silver Market Review from GFMS. Silver demand from ethylene oxide producers is set to remain flat this year at 10.2 million oz after demand doubled last year. But this will be offset by weaker jewellery fabrication demand, which is forecast to drop 8% this year, and from a drop in physical coin and bar sales. Total silver supply is seen falling 3% to 1.0124 billion oz due to reduced output from lead/zinc and gold mines.
Global mine production declined by 5.8% in 2016, according to the latest estimates by the WBMS. We expect a modest expansion of mine production in 2017. Expansion projects at Fresnillo and Pan American Silver should support production growth in Latin America. Higher production is expected from the Cannington mine; additional output is expected as small and mid-tier base metal producers, particularly with exposure to zinc, begin to restart shuttered mines and boost output to capitalise on the current price strength.
Silver’s correction last week suggests the test above DTL resistance formed from the July 2016 was a step too far. Given the weaker tone across the industrial commodities, we feel silver will remain vulnerable to pressure in the short term; however, the fact the recent correction has encountered dip-buying indicates sentiment remain bullish and that prices will resume an upwards bias once the current consolidation phase is complete.