Precious metals are posting a strong week as equity trading begins on Friday, with silver shining brighter than its higher priced cousins. At $22.81 per ounce, silver for September delivery, the most actively traded contract on the Comex division of the New York Mecantile Exchange this week, will notch gains around 12 percent. That’s the biggest weekly gain for the most active contract since October 2011.
Metals in general have faced pressures on several fronts. Stateside, fears over the Federal Reserve reducing its stimulus package of buying $85 billion every month in Treasuries and mortgage-backed securities have investors concerned that precious metals will lose their flavor as a hedge against inflation. Economic stimulus is largely viewed as helping gold and silver appreciate in recent years. Although, in fairness to that theory, silver prices have been fading since highs near $50 in early 2011, while QE3 has been running at full steam.
Probably more important for silver than an inflation hedge is its use as an industrial metal and global demand in that regard, especially from China.
China, the world’s largest economy by manufacturing, is a top consumer of industrial metals like copper and silver due to their many applications. Silver has the highest electrical and thermal conductivity of any metal, making it crucial in solar applications, electronics and much more.
There’s no denying that China’s economy has slowed in growth, which has been a major concern in evaluating future silver demand. GDP slipped from 7.7 percent in the first quarter to 7.5 percent in the second quarter, matching the 2013 Chinese government target. There are worries that China’s GDP will drop below that target, but the Central Politburo of the Communist Party of China said late in July that it will take the necessary steps to increase imports and stabilize exports to maintain consistent growth. The State Council also recently vowed to make the energy saving sector, including solar, a “pillar” of its economy by 2015, a pledge that bodes well for silver.
Looking at the technicals of spot silver, we can see that the white metal blew through a resistance point at $20.50 to start the week and build on gains that started last Wednesday by coming off a support level around $19. Importantly, silver moved above the 50 day moving average (blue line), something it has not done since early this year (and even then it didn't stay above it long). There is some more resistance right were silver closed on Thursday at $23, which could prove formidable. For starters, it’s Friday and some profits may be locked-in before the weekend to protect against any possible pressure that could arise. Secondly, $23 was an old area of support back in April that – in classic technical analysis fashion - doubled back to serve as resistance once it was broken in May. Above that level, look for more resistance around $24.50 (not drawn).
Are the pressures on metals over? From a technical standpoint, they are certainly looking strong, but there’s not one analyst that could be more precise than another in making that prediction. China and the Fed are going to still exert plenty of forces in the near future and that info is yet to be determined. That fact of the moment is that gold and silver reached grossly oversold conditions and it was time for a correction. Traders have flocked to precious metals recently as a safe haven from falling equities as uncertainty looms about the markets getting overstretched in their rally to new highs with QE3 tapering hanging in the balance.
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