As silver limped into the third quarter (Q3), many market participants were desperate for fresh monetary policies from central bankers. Investors were mostly on the sidelines and prices were weak, bobbing above and below $27. By September, silver had again displayed its ability to outperform even gold and was working to post a close above $35. But the central-bank-related momentum quickly waned, leaving silver to enter the final quarter under pressure.
Silver spent a spent a significant portion of Q3 stuck in various ranges. At the end of July, the metal managed to break through resistance at the $28 level. It was only during the third week of August that silver was able to gain breakout momentum and move above $29.
At that time, there was a risk-on vibe in the equities markets. On record is a vow from European Central Bank (ECB) President Mario Draghi to do “whatever it takes” to save the euro. Spain had a bond auction that was considered successful both in terms of demand and rates. Further, minutes from a Federal Open Market Committee meeting seemed to indicate that the Fed was leaning toward a third round of quantitative easing (QE3).
Silver rose above $30 and kept going. The upward move was driven by pro-QE3 statements made by the Federal Reserve at the Jackson Hole Symposium. Further momentum was added when Draghi unveiled an unlimited bond-buying program. Finally, Federal Reserve Chairman Ben Bernanke announced the bigger-than-expected, long-awaited QE3, which involves the central bank spending $40 billion per month on mortgage-backed securities.
Q3 revealed notable contrasts among investors. In the COMEX futures market, for example, there was a strong build-up of net speculative length. Over 900 tons were added during the final week of July, the heftiest increase since February, and additions continued throughout the quarter. But this bullish drive on the speculative side brought into focus the fact that commercial players were taking the opposing position and heavily stacking up short positions.
Quarterly data from ETF Securities shows regional differences in investments in physically-backed silver products.
During the first two months of the quarter, when there was more turmoil surrounding the Eurozone crisis, Europeans were the dominant ETF investors, with $182 million in inflows seen from that region. North American investors, on the contrary, were net sellers in August, pulling $76 million out of silver ETFs. In September, when Draghi announced the bond-buying program, thus easing concerns about how countries such as Spain could potentially be bailed out, European ETF investments came to a halt. But Bernanke had North American investors wired up and they put $362 million into silver ETFs.
In Q3, silver ETFs saw $477 million in inflows. According to ETF Securities’ Q3 2012 Global Commodity ETP Trends data, with the large price increases, assets rose by $5 billion to $20 billion.
Silver miners’ share prices also received a boost as they too were caught up in rally fever. Silver prices saw gains of about 25 percent for the quarter. However, silver miner ETFs fared even better, with Global X Silver Miners (ARCA:SIL) up about 35 percent and iShares Global Silver Miners (ARCA:SLVP) up about 34 percent.
Silver’s strong performance in Q3 was largely based on rapid price increases associated with the anticipation of new monetary policies from central banks and the fulfilment of those expectations. Now that announcements and celebrations have passed, silver has rapidly lost momentum.
Silver has been repeatedly defeated in its attempts to post a close above $35, a resistance level that Scotiabank believes is unsurprising.
“[E]arlier on in the year … traders were reporting considerable producer selling interest around the $35/oz to $37/oz area. It therefore seems reasonable to assume that there is still selling interest in that region and until it is absorbed, the uptrend will struggle to make headway,” states a market report from the bank.
But the problem does not end with mere resistance to higher highs. Pressure on silver is pushing the price lower as Q4 progresses and discussions about a potential correction are emerging among market participants.
Silver is still reliant on industrial demand, which remains weak. Standard Bank has repeatedly issued warnings about large silver stockpiles in China — a key silver market — that it believes have yet to be drawn down. Evidence of a slowdown in that nation is mounting; the World Bank downgraded its growth forecast just last week.
Demand from India, another important silver market, has been negatively impacted by its weak rupee. Additionally, much of the investment made in the metals market comes from individuals relying on agricultural income. “A marked deficiency in monsoon rains so far this season is … expected to depress [silver] sales in 2012,” a report from A-1 Specialized Services & Supplies indicates.
Investment demand still carries a significant burden, but many investors now also appear hesitant and seem to be waiting to see if a catalyst will emerge to drive silver higher.
Near-term inflation seems unlikely to be that driver.
“Promises of hyperinflation here and now have not materialized despite three rounds of Fed QE being pumped into the markets,” said Jon Nadler, a Kitco senior metals analyst.
“The rally between gold and silver has been very concurrent,” Martin Arnold, a researcher for ETF Securities, explained. “It tends to be that investors look to silver more as a play on the volatility in gold.”
But the yellow metal has had trouble of its own achieving new highs and is also under downward pressure.
There are also growing concerns about the aforementioned positioning in the futures market.
“If uncertainty comes in and we see significant investor deleveraging, silver is more exposed for a more significant drop than gold, said Arnold.
Last week, Scotiabank said, ”[w]e are watching support at $33.37, the low from September 26th, as a breach through there on a closing basis could indicate a double-top in silver, which would target the low $31.00 level.” Double top is a technical term that refers to price action that forms an “M” pattern on a chart due to a price rise, decline, second rise and second decline.
On Monday, the final New York spot price for silver was $33.16.
At this point, few seem prepared to make a decisive call about what lies in store for the silver market in the short term. However, a growing number of market watchers agree that it looks like the market is about to see some action. And even many who continue to express bullish sentiment readily admit that action could be a price drop.