SILVER TODAY – Holding ground amid two-way flows

Analysis

• Silver has moved lower broadly in tandem with industrial metals. But it found support at the 50% Fibo ($18.48) of the June-July rally from $15.82 to $21.13.
• The stochastics suggest prices are attempting to bottom out but have yet to signal stronger sentiment.
• Resistance overhead is seen at $19 and at $19.35 from the 20 and 55 DMAs.
• Failure to hold current support would suggest a test of the 100 DMA ($18.23) and the medium-term UTL ($18.20) formed by the Jan-Feb lows.
• Further support is seen at $17.84 – the 38.2% Fibo of the June-July rally.

Other factors

Net length among Comex speculators dropped for a fourth consecutive week as of August 23. It now stands at 83,203 contracts, down 1,786 contracts or two percent from the previous week and 13 percent from its all-time high reached earlier in August. The silver price slumped almost five percent over August 16-23. The deterioration in spec positioning was largely driven by a build-up of shorts of 1,154 contracts that was reinforced by long liquidation of 632 contracts. Speculative sentiment was weaker despite a positive macro backdrop for precious metals and an increase in the NLFP in gold; this is not encouraging for silver. But considering the fast pace at which the silver NLFP has risen in recent months, this drop could be some healthy profit-taking – weaker hands may be exiting the market. Looking ahead, we believe the macro environment will remain positive for precious metals, especially gold and silver, thanks to a cautious and patient Fed. Speculative sentiment toward silver is likely to improve again in the coming weeks – if the September 2 US jobs report is weaker than expected, it could be the trigger.

Investment demand has proved more mixed recently:

• So far ETF investors remain bullish, with dip-buying into recent weakness lifting ETF holdings to a fresh 2016 and all-time high of 661.88 million ounces (basis the funds we monitor).
• Higher prices have tempered retail investment demand – sales of American Eagle coins have slowed to a 1.3-million-ounce pace in August from 1.37 million ounces in July, 2.83 million ounces in June and 4.4 million ounces in May. Sales totalled 27.6 million ounces in the first seven months of the year, up only one percent on the year-ago total.
• Silver coin/bar sales by the Perth Mint in the first six months of the year were up 135 percent on January-June 2015.

South32 recorded silver production of 5.037 million ounces in the April-June period from the Cannington silver mine – the world’s largest. Production in the year ending June 30 totalled 21.39 million ounces, down one percent on the year due to lower ore grades; this was also below production guidance of 21.6 million ounces. It expects output to slow to 19.5 million ounces in its 2017 financial year, according to a recent presentation.

Silver supply is also likely to be tightening – the production cuts and closures at zinc and lead mines will also have hit by-product output of silver. The latest INEGI figures show mine production in Mexico increased 2.7 percent year-on-year in May but it was still down 3.8 percent overall in the first five months.