Citi's Silver (Lining) Playbook

With Silver’s strong recent run, Citi FX Technicals suggest the present technical set up is now starting to look very constructive. At the same time, they add, Gold is also starting to move higher; and trending moves in the precious metals (up or down) tend to be led by the Silver price and the Gold/Silver ratio remains supportive of that view again. Given that they remain cautious near term about the fortunes of the US Dollar, all of the above would suggest, Citi concludes, that the “playbook” is to be long Silver against the USD.

Via Citi FX Technicals,

Silver- Weekly chart looks to be forming a base

Silver posted a perfect 76.4% pullback of the 2008-2011 rally at $18.22 in June and has steadily moved higher.

Positive triple momentum divergence was also evident at that low.

Last week Silver added to this set up with a bullish outside week by closing above $20.30 and has since surged higher again today.

Major resistance on the weekly chart is substantially higher than here at $26.08-26.40 (Prior breakdown points) and then $27.70-27.87 (200 and 55 day moving averages )

Has closed above the 55 day moving average for the first time since February this year (On Friday) with a wide gap to the 200 day moving average at $26.72.

This would be a natural initial target for the move and take us right back to the breakout point from April of this year.

Is above the 55 day moving average again with good resistance in the $1,338-1,348 area. A decisive break above here would suggest renewed gains back towards $1,525-1,535

Gold/Silver ratio looks set to head lower.

Fell just short of the level seen in August 2010 before it turned sharply lower and has broken below the 55 day moving average

Good horizontal support exists around 62.50-62.80 (Lows through which we accelerated in Sept 2010 and recent corrective lows.)

Below here and we would target at minimum the converged rising trend line and 200 day moving average (58.60-57.92) about 8% below here. That would be consistent with a gold price around $1,520 and a Silver price around $26

Gold rose sharply in from that August 2010 period all the way through August 2011 with Silver leading the way for 8 of those 12 months. (During that 8 months the Gold /Silver ratio fell over 50%)

During that 8 month period in 2010-2011 the USD-index also fell 10% and EURUSD rose from 1.2588 to 1.4282 (13.5%)

EURUSD – Still a danger of a double bottom forming

A decisive break above 1.3416 would confirm this pattern and suggest as high as 1.4080.

During this period from August 2010-April 2011 the equity market performed well (S&P up over 30% albeit after a 17% drawdown in the April-July period) and the US 10 year yield fell from 2.96% to 2.33% between August and October 2010.

So contrary to considered opinion, if we were to see some or all of these moves above materialize it is more consistent with Fed easing than Fed tapering. The Fed resumed bond purchases in August 2010 (having paused in June) as the economy faltered. By November 2010 it had done a complete “180 degree turn” and put QE 2 in place

As we stand at the moment opinion is growing that tapering will start in September. While the charts above do not necessarily say this will not happen, they do suggest that yet another attempt to “withdraw accommodation” may ultimately prove to be short-lived.

Right now as we watch how this dynamic evolves the charts above suggest that Long Silver looks to be one of the best trades to have in your “playbook”


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