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CONDITION RED: Important Silver Threshold Line Broken… What Next??

by Steven St. Angelo, SRS Rocco:

The important silver threshold line was broken briefly last week and continues to bump up against it in early trading today.  If the silver price closes above this threshold line by a significant margin, it could mean big trouble for the bullion banks who hold record silver short contracts.

I wrote about this in my article, WATCH OUT if Silver Breaks Through This Threshold Next Week.  The important silver threshold line is the 50 (MA), or what is known as in technical terms, the 50 month moving average line.  Because I used a 20 year monthly chart, the 50 (MA) line refers to the moving average in monthly terms.  If the chart is shown in weeks, then its a weekly moving average… and if it is a daily chart, then it is a daily moving average.

Here is an updated 20 year silver chart which now shows a 50 (MA) of $20.35:

Silver-10-Year-50MA-070816-Chart

Let me explain this chart, especially for new folks to the site and the industry.  While I focus on the mid to long term fundamentals of the silver market, professional traders look at these charts and trend lines very carefully.  Normally, I don’t spend much time looking at this info, but because we have now punctured an important silver trend line, what happens next could be very interesting.

There are two lines in this chart.  The RED LINE is the 200 (MA).  This is the average silver price based on a 200 month moving average.  What is important about this 200 (MA) trend line is that once the silver price moved above it in 2004, it has not fallen below it, except very briefly at the beginning of 2016, when it bounced off it.

Thus, the 200 (MA) in this monthly chart denotes a bottom that traders are looking at.  Because the silver price bounced off the 200 (MA) and is now trading at $20, traders believe silver will not fall below $14.65.  Thus, $14.65 is a strong support level for silver on a long-term monthly chart basis.

Now, there is the 50 (MA) BLUE LINE.  Ever since the silver price fell below the 50 (MA) line in the beginning of 2013, it has stayed below it for nearly three years.  However, it finally broke above it last week when silver hit $21 briefly.  Professional traders are looking very carefully at how silver trades over the next few weeks.  If silver closes above $20.35, the 50 (MA) trend line at a significant margin by the end of this month, we could see a lot more hedge funds and large traders jump into the silver market bandwagon.

However, the bullion banks who hold record commercial silver short contracts, will likely defend the $20.35 price at all costs.  Here is a Kitco 3-day silver chart:

Kitco-3-Day-Silver-Chart-50MA

Last night in early Asian trading (shown as a RED LINE), the silver price once again broke above the 50 (MA) $20.35 threshold line.  Then in London and U.S. trading (GREEN LINE), silver continues to bounce up against the 50 (MA), which is shown as a yellow dotted line.

The reason the bullion banks will likely defend this $20.35 price is due to the massive amount of commercial short contracts they hold.  Here is a Silver Cot Report Chart showing the massive increase in Commercial short contracts:

Silver-COT-REPORT-Chart-070816

The RED BARS at the bottom of the chart represent the increase in Commercial Net Short positions.  That figure is shown on the left part of the chart.  The Commercial Net Short position is calculated by taking total Commercial Short contracts and subtracting total Commercial Long contracts.

Commercial Shorts (154,486 contracts) – Commercial Longs (55,718 contracts) = 98,768 Commercial Net Short positions.

As we can see, the Commercials hold a record number of net short contracts.  However, if we go back to the end of 2015, the Commercial Net Short silver contracts were about 24,000 contracts.  This was at the time the price of silver hit a low of $13.85.

Which means, since the end of 2015, the Commercials’ Net Short positions have increased by a whopping 75,000 contracts.  Those new to the silver market need to understand that each contract represents 5,000 oz of silver.  Thus, the Commercial Net short position in silver is now 375 million oz.

Here is the big problem for the Commercials.  As the Commercials (bullion banks) have been adding to their net short silver positions, they continue to be underwater as the silver price increases.  While there is no way to know how much underwater the Commercials are in silver, we can make an estimate.

The Commercials have added 75,000 net short silver positions as the silver price increased from $13.85 to $20.50.  If the silver price moved up about $6.50 during this time, we can assume that the Commercials average price is half of that figure.   But, let’s be more conservative and just say the average price they are underwater is $2.50.  Thus, the Commercials are underwater $937 million, or nearly a $1 billion.  That could amount to one hell of a lot of losses if the price of silver continues to rally higher.

Furthermore, if the price of silver does close above the 50 MA of $20.35 at say $21 by the end of the month, then we will likely see more hedge funds and large traders move into the silver market as a leverage trend play.  This would cause the Commercials to be underwater at an even higher level.

This is why I call the breaking of the $20.35 Threshold line, CONDITION RED for the Commercials. 

Now, I don’t know what the short-term silver price outcome will be.  Although, as the Central Banks continue to add more QE to prop up the broader markets. this added liquidity may also make its way into the precious metals.

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11 comments to CONDITION RED: Important Silver Threshold Line Broken… What Next??

  • rich

    Ex-Fed head Bernanke backs Abe gov’t’s economic stimuli: spokesman

    Tuesday July 12, 2016 08:36

    Former Federal Reserve Chairman Ben Bernanke expressed support Tuesday for the Japanese government’s commitment to economic stimulus measures in talks with Prime Minister Shinzo Abe, Japan’s top government spokesman said.

    Abe told Bernanke the government is ready to take bold policy action, as Japan has only “come halfway to getting out of deflation,” Chief Cabinet Secretary Yoshihide Suga said after Bernanke and Abe met in Tokyo.
    http://www.kitco.com/news/2016-07-12/Ex-Fed-head-Bernanke-backs-Abe-gov-t-s-economic-stimuli-spokesman.html

    • fonestar

      The Japanese retirees seem to still believe Switzerland is a safe place to store their gold. In other words, they do not own any real gold and will probably be robbed.

  • fonestar

    It’s kind of difficult for me to get excited about these stories, since I was buying silver in the $30s and $40s back in 2011. I know that silver will have its day in court though against the banksters and I wasn’t planning on selling this silver for clown bux anyway.

    • Eric

      Why didn’t you buy any at $14??? It was a screaming buy then and we were all saying it.

      Silver and Gold are not investments. They are vehicles for your savings. Price does not matter. Accumulation does.

      One can speculate elsewhere… Equities, crypto, real estate, etc. those have risk. Physical metal does not.

      • fonestar

        I never said that I wasn’t buying at $14 – $20 did I? I just said that much of my silver was bought at $30 – $40.

        • Eric

          That’s still a bargain.

          • fonestar

            That’s my whole point. I don’t care about the “dollar” price. I paid $20 for a sterling ring today that’s only 1/4 troy ounce. It’s 1/4 troy ounce less that those who never wanted silver to begin with will have access to when the shit hits the fan.

            • Eric

              If it’s only 1/4 troy ounce then it’s around $5 USD today. Why not spend $20 to buy one full troy ounce instead?

              Bullion coins or bars are money. Not jewelry.

      • Ed_B

        @Eric

        “Price does not matter.”

        lol… of course price matters. Price ALWAYS matters… until it does not. Currently, it still matters. Remember that it was the Internet stock bubble-blowers who were claiming that “price does not matter” back in 1999-2000. They were wrong… BIG-TIME… and the disastrous crash of 2001-02 proved it beyond ALL doubt. One day, when the SHTF, THEN the prices paid for PMs will not matter. But until then, it matters. If price does not matter, I will sell you my entire silver stack for a mere $100 per oz. 😉

        • Eric

          But that is investment type thinking Ed. Not saving.

          Of course price matters. But price does not trump value.

          My only point is that what different does it make if you bought at $15, $30, $45 when the fair market value of one troy ounce of Silver is far above that.

          It’s the DOLLAR that has changed. Not the Silver.

  • GoldTooth999

    The anti-silver horde will throw the kitchen sink and everything else to sink the price. But that won’t matter. They will eventually capitulate and wave the white flag as phyzz takes over. $200 PoS by Christmas Eve is a no brainer. The wise men see this watershed moment happening now.

    Today’s plunge is just a major topic for another beer drinking day.

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