Silver Advances as Buyers Return

July 23, 2011 Justin Market News

After a brief pullback earlier in the week, silver made a strong move to the upside in morning trading to advance from just below the $39 per ounce mark to over $40 by noon (New York time). Futures saw renewed buying interest after a short-lived bout of profit-taking during the morning hours. From a technical standpoint, traders can consider this a positive development as the correction tested recently formed levels of support and held nicely. The pullback helped to relieve what was beginning to look like a potential overbought scenario and turned it into a healthy consolidation that has the potential to set up the market for another leg to the upside.

If the price can clear the closing high of around $40.32 from June 17th, it could set the stage for a rapid advance to test the highs put in place during the final week of April. Regardless of whether that occurs ahead of the weekend, the market remains at the highest levels seen during the last 60 days. Commodity chart patterns that demonstrate a gradual move up and out of a base like what has occurred over the last two and a half months have a high historical probability of leading to higher prices in the future.

The biggest question the market needs an answer to over the next week to ten days is how the U.S. and European debt issues will be resolved. There is a growing consensus that a favorable resolution could tip the scales in favor of riskier asset classes like stocks over metals in the short-term. While the exit of safe-haven buyers may lead to a few buying opportunities, there appears to be plenty of uncertainty to keep new bids from entering the market on any dips in price. In the event that an agreement cannot be reached prior to the August 2nd deadline, confidence in the financial markets could be shaken for quite some time leading to a major run-up in the price of silver and gold.

On the demand side, the market seems to have priced in somewhat of a hard landing for the economy in China but signs are beginning to emerge that consumption of industrial metals such as gold, silver, and copper is actually increasing. Higher industrial demand is a trend that often pushes prices higher.

For now, a continuation of the uptrend appears likely despite the fact that the current spot price puts the one-month gain for the metal at a staggering 8.6% compared to gold which advanced 2.9% during the same time period. Typically, a period of consolidation occurs after such a strong move while the market builds new areas of technical support.

Typically, silver is a leading metal during a commodity bull market and the recent action in precious metals may offer some clues as to how the global debt crisis will eventually resolve. The financial markets have historically been an excellent predictor of future economic developments and there are no indications that any deviations from that standard are on the horizon.

Traders looking for an entry point can look for a buy signal to be generated on a close above $40.32. An initial protective stop could be placed below yesterday’s closing low around $39.30. Look for a price target of at least $42.25 on a breakout. Remember, retail traders in the United States are no longer able to trade precious metals on margin so alternative options such as the AGQ (ProShares Ultra Silver) are a great way to participate in the market. Be sure to check the main page for updated quotes and charts.