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Why One Trader Thinks "Silver's Plunge Is Nearing Completion"

Precious metals fans have had to content with a triple whammy this year: not only is the dollar weaker, not only have cryptocurrencies - seen by some as a natural alternative to safe PMs, especially among the younger generation - soared since the start of the year, blowing out all other asset classes including precious metals, but gold and silver have largely gone nowhere despite a year of political volatility and central bank confusion.

There is a ray of hope however: according to Bloomberg's macro commentator Marc Cudmore, silver's "justified" plunge - as gold and silver have a strong correlation with real rates - is finally nearing completion, as "we are approaching the point where both higher yields and lower yields have the potential to boost the asset class."

The technicals are also turning: "In euro terms, silver is looking stretched to the downside based on its relative strength index, a momentum measure. It should also be supported by its 31-month upward trendline, which it’s testing now." Finally, "Monday is the first day of silver and gold futures trading on the LME. That might provide a fresh source of excitement and buying interest."

Finally, while there are "clear dangers involved when trying to catch a falling silver knife" Cudmore notes that "a risk-reward analysis makes an attempt appealing."

His full Macro View take below:

"Silver’s Justified Plunge Is Nearing Completion", by Mark Cudmore, a former FX trader who writes for Bloomberg

 

Silver is plunging and it’s even worse than it first appears when you consider that the dollar is having a bad year. In euro terms, the metal is down 24% from its April peak. Still, there are reasons to argue that the shift lower is mostly complete. 

 

Gold and silver have a particularly strong correlation with real rates since the metals provide no yield, and hence demand is inversely related to the opportunity cost of speculation.

 

An environment in which global bond yields are rising in the absence of significant inflationary pressures is about as bad as it gets for speculative precious metals, so the move makes sense.

 

However, if the rise in global yields persists, then severe spillover effects in other asset markets could prompt a bid for precious metal havens again. So we are approaching the point where both higher yields and lower yields have the potential to boost the asset class.

 

Technicals also look potentially buoyant. In euro terms, silver is looking stretched to the downside based on its relative strength index, a momentum measure. It should also be supported by its 31-month upward trendline, which it’s testing now.

 

Another thing -- Monday is the first day of silver and gold futures trading on the LME. That might provide a fresh source of excitement and buying interest.

 

There are clear dangers involved when trying to catch a falling silver knife, but a risk-reward analysis makes an attempt appealing