Silver Hit Hard Despite Industrial and Retail Demand

by on May 1, 2014 9:01 pm BST

The precious metals complex has been taken to the woodshed, and silver’s association with gold is not helping. Despite seeing demand for industrial purposes and retail investing, silver has broken $19 per ounce for the second time in two months. Traders are selling silver due to the complacency in the high risk appetite with equities continuous making new highs.

Robin Bhar, head of metals research at Societe Generale, said “the industrial driver can help, but I don’t think it’s as influential as the investor.” Silver is used in a variety of car parts, among other items like electronics. Total car sales remain elevated at 16 million, but today’s data showed a drop from last month’s tally of 16.4 million. Analysts were looking for 16.2 million. European car sales increased in its seventh consecutive month. Industrial usage is expected to grow by 2.9 percent.

Market participants, also, do not see a need to hold only silver when the Federal Reserve is tapering at $10 billion per month and expected to stop asset purchases by later this year. However, silver-backed exchange-traded funds (ETFs) seen a little action with holdings up by 1.5 percent in 2014.

In the face of institution bearishness, retail demand is increasing. The US Mint sold 18.47 million ounces of silver American Eagles this year. This compares to the 18.3 million sold in the first four months of last year, which was the most for the period since 1986. The independent investor still sees value in silver as a longer-term hedge against irresponsible central bank policy.

The 90-day 4H chart shows that silver was driven down to the demand zone sub-$18 percent ounce. A new low was created at $18.68, but there was a solid demand to bring silver back up through $19 per ounce. Unfortunately, the ongoing pressure on gold and silver will be tough to break through. Spot prices are not representative of demand, and large speculation will likely keep the metal near $19 an ounce. Analysts expect silver to average $19 to $18.80 per ounce through the third quarter of 2014.

4H Chart of SI

4H Chart of SI

The 10-year weekly chart is looking awfully bearish if silver breaks $19 and there is no longer significant demand. A close below will signal further bearishness and send silver down to $17.58 per ounce with secondary levels at $16.33 per ounce. Whereas, retracement to $19.84 is probable.

1WK Chart of SI (10Y)

1WK Chart of SI (10Y)

The ongoing uncertainty in the US economy should keep silver somewhat elevated. The advanced gross domestic product came in at .1 percent, which looked like something out of the eurozone. Economists where discounting the figure with a worst case weather-affected scenario of 1.2 percent. Now, financial institutions are forecasting first quarter GDP to come into negative territory. JP Morgan has been the latest to model negative growth. Initial jobless claims came in at 344K, a nine-week high. Furthermore, corporate earnings are tracking the weak GDP at .1 percent, much lower than expected.

Although silver looks technically broken, it makes fundamental sense to have small allocations in silver.