Ahead of a Major Support Level, a Silver Whiplash Is Likely
While equity markets have been on an absolute tear in 2013, many
commodities have been hung out to dry. As investors have become
more comfortable with stocks and a bit more risky in their
portfolios, one asset class has been particularly pummeled:
precious metals. It wasn't long ago that analysts were calling for
silver and gold to hit unprecedented highs (gold, in fact, did hit
historic highs in 2011) only to watch their prices take a major hit
in the subsequent months.
Much ado has been made over gold's big drop in 2013 , but silver's fall from grace has received less attention from investors. Now, the white metal is nearing a make-or-break support level that will likely dictate its near-term future.
Silver Testing Critical Levels
Silver holds a major support at the $22 level, meaning it is currently just inches away from this key level. With precious metals grasping at straws, it seems like a matter of when, not if, silver will hit this support level. From there, there seems to be a wide array of differing opinions on where the commodity could go, but the outlook is quite bleak.
Some feel that the $22 level will encourage a wave of buying as bargain hunters step in at a level they feel is an attractive entry point. This would likely allow silver to make a nice bounce higher and give it some much needed momentum. But all signs seem to be pointing to the fact that $22 is a trap door as opposed to a bottom for the metal.
Silver has already lost more than 26% in 2013 and is down over 60% from 2011 highs. All of this in the wake of surging stocks and threats of Ben Bernanke eyeing an end to QE, which many believe to be propping up the market. Worse yet, big money managers seem to be taking notice and increasing their bets against the commodity. "The ratio of long to short positions in silver among managed money is nearly 1-to-1. One month ago, that ratio was 1.5-to-1″ writes Lawrence Lewitinn . This is on top of slashed forecasts from institutions like JPMorgan ( JPM ) and Bank of America ( BAC ).
Where Silver Goes from Here
Should silver fall below the $22 level, look for a harsh and swift sell-off as stop-losses are triggered and traders scramble to get out of positions. Some see the next major support level around $18; which would represent a fall of just under 19% from current levels. At those levels, the commodity could certainly see a number of buyers step in, but much of that will depend on the macroeconomic environment.
Precious metals have been the beneficiary of three rounds of quantitative easing, and QE is on the verge of expiring. Should an official end to easing programs be announced, look for precious metals to take a major hit, throwing any major support levels out the window. The performance of stocks will also be a key factor in silver's future; if markets continue their run-up, it seems extremely unlikely that the white metal will gain any momentum. No matter what kind of sentiment you hold for silver, keep a close eye on the commodity in the coming days as they could define the remainder of its year.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ .