Silver in focus: prospects and trading ideas

Hi dear colleagues! Amid the stunning rally of gold, I shifted focus away from other precious metals. Today I decided to fill in this gap. Indeed, interesting developments have been unfolding in this market. As silver has spiked over 20% in the latest couple of days, many of you are bitten by the speculative big. I urge you, please read my article up to the end before you click the Sell button. Perhaps you will change your opinion. At the same time, I don't want to impose my views on you. Everyone is the architect of their own fortune!

Gold, silver, and copper used to serve as money back in ancient times. In fact, any money is a unit recognized in a society as a medium of exchange. In Polynesia, sea shells were employed as money. First paper banknotes were printed in China. In the course of history, gold and silver were traditionally used as an equivalent to a certain value. They lost their property of a legal tender in the middle of XX century. As for copper, people still pay by coins made of copper. The Bretton Woods system required a currency peg to the US dollar which in turn was pegged to the price of gold. This concept was strongly disliked by the US. The Bretton Woods monetary system was replaced by the Jamaica international agreements. As a result, Forex came into being. The US dollar pegged to public debt is the cornerstone of the Jamaica system. In a nutshell, the debt concept is a new elixir stone created by American financial pundits. In fact, they failed to generate gold from lead but invented the idea of how to make money from air.


Any monopoly does not tolerate competition. Gold poses a serious threat to the reign of the king dollar. Being a less valuable asset, the US dollar insists on its own rules of the game aiming to defeat its bitter rival in the financial field. In fact, gold has always remained a lucrative investment asset. However, silver has been squeezed out of the investment portfolio and turned into commodity. Banks set the rule that silver is not rated as an investment asset. Transactions with silver are subject to big taxes. Thus, buying silver as a physical asset does not make sense in terms of investment.

Now I have a food excuse to say that InstaForex offers traders a great opportunity to earn from price fluctuations of gold (#XAUUSD), silver (#Silver) and other precious metals like platinum (#PLF) and palladium (#PAF). The broker charges minor commissions on that. Importantly, before you set about trading, you should grasp the point what's going on now in the market. The question of vital importance is to buy or to sell. You have to answer these questions on your own. As for me, I'll try to make you figure out what's actually happening.

To begin with, let's find out the ratio between the gold price and the silver price. Traditionally, this ratio used to be 44:1. In other words, to buy 1 ounce of gold you had to pay 44 ounces of silver. However, some amendments were introduced to banking rules, so this ratio saw some changes. An average ratio has become 1:80 over the recent 5 years. In a broader timeframe, an average ratio has been 1:60 since 2007. These values are viewed as reference figures (picture 1).


Picture 1. Ratio between gold price #XAUUSD and silver price #Silver

According to chart 1, in March 2020 the ratio between the gold price and the silver price was 126 that was twice as big as average values over the recent 13 years. Besides, that ratio was thrice as big as historic values. Such developments made buying silver rather gainful investment. In July, the ratio between the gold price and the silver price returned to the zone of 5-year average values. However, the ratio is still 1.5 times bigger than average 13-year values and twice bigger than historic values. What I mean is that since 2011, we have been watching a steady trend of a growing gold/silver ratio that was caused by the banking rules which downplayed silver as investment. In terms of technical analysis, this trend is set to continue until it reverses. Therefore, I'm NOT going to predict that silver is likely to grow to the ratio of 60:1. I need clear-cut technical signals for that.

Nevertheless, we have a great reference figure. If the gold/silver ratio closes July below 80, it means a reversal of the growing trend and the prospects of a decline towards 60. In this case, taking into account the current gold price of $1,875, the silver price could rise to $31 that is 50% up from the current level. Please keep that in mind when you are going to click the Sell button. Certainly, anything could happen. If the gold price loses in value, it will push silver down. We can only guess what will happen later. It is goes without saying that a trend is set to continue until we find out opposite conditions. Gold does not signal any trend reversal, so silver also is on the path to new highs. Another thing. A further bullish trend of silver is confirmed by the Commitment Of Traders (COT) Report. Two months ago, in mid-May, the open interest in the futures market dropped to the lowest level in 5 years that was 175,000 contracts. Speculators were unwilling to invest in silver. So, there were just 28,000 long contracts on silver. Today the situation is different. Amid growing open interest, the number of contracts increased to 219,000 contracts. Besides, long speculative contracts equaled 66,000. It proves that large market players are entering the market. Indeed, speculators sniffed out the trend which could bring nice profits.


Picture 2. Technical analysis of silver

A lot of traders have a bad habit which makes them lose money. Trading on Forex, they think that trends are over without being developed in full. However, this principle doesn't work for most markets. The theory and practice prove that if a trend has emerged and has been recognized, it will not be over immediately. At present, we think that silver is much overvalued and has nearly approached resistance. The problem is that it is extremely difficult to catch a perfect market entry point, so that you can relax in an armchair and watch your long order multiplying profits. Personally, I don't believe in such perfect entry points because you I have to make a trading decision from those levels which the market suggests, but not those levels which I like in theory.

Analyzing the market dynamic, open interest in the futures market, and the fundamental background, I reckon that silver is set to carry on with the bullish run. So, the question is to find the right market entry point which the readers should decide on their own. Please look carefully at the pros and cons and eventually make a sensible trading decision. Be prudent and careful! Make sure you follow money management rules!

The material has been provided by InstaForex Company -