Look For the Silver Lining

(Today’s musical accompaniment is over 100 years old)

Last night I got an alert that silver futures had traded above $80 per ounce.  Knowing silver’s recent parabolic move, I turned to my wife and said, “if you have any silver jewelry that you no longer wear, sell it.”  Well, that wasn’t quick enough.  With the expiration of the December contract occurring today, we had a startling intraday reversal.

Is this enough volatility for you?

1-Month Silver Futures, December (red/green hourly candles), January (blue line)

Source: Interactive Brokers

This is the sort of move that only seems to occur in the movies[i], but it has been known to occur in expiring futures – famously on April 20, 2020, when the expiring oil contract went negative.   While most futures expire without incident, supply/demand dynamics can get particularly stressed around expirations and price limits in physically deliverable contracts are often removed on those days, allowing for much wilder than normal moves.

The 1-month chart above shows a steep ascent, but a longer-term chart makes it apparent that the recent rise has been parabolic, not linear.  We have frequently asserted that parabolic charts mean someone is in pain, noting that

Parabolic uptrends imply that some group is desperate for the commodity or security in question.

and

Parabolic uptrends are almost always unsustainable for long periods of time and tend to reverse abruptly and sharply.  The question is when.

In the case of silver, a combination of supply concerns and incredible demand from momentum-loving traders sent the commodity on a wild ride higher before the inevitable reversal. 

6-Month Silver Futures, December (red/green daily candles), January (blue line)

Source: Interactive Brokers

Some of the recent move can be attributed to the overall rise in precious metals, but as the chart below shows, silver and gold futures moved in rough lockstep until mid-October, after which silver zoomed ahead.  Note also that silver’s overnight plunge turned around after just about touching its 20-day moving average.

6-Month December Futures, Silver (red/green daily candles) with 20-Day Moving Average (purple line), Gold (blue line)

Source: Interactive Brokers

The comparisons to “digital gold”, aka bitcoin, are inevitable.  We saw bitcoin make a run at $90,000 while silver was ripping higher overnight, but it has since settled back to the $87K range that has prevailed in recent days.  In a year that was supposed to feature cryptocurrencies, bitcoin has been a disappointment after failing to sustain its run to $125K.  Meanwhile, metals moved steadily higher throughout the year, vastly outperforming crypto.

1-Year, December Silver (red/green daily candles), December Gold (yellow line), Bitcoin (blue line)

Source: Interactive Brokers

Interestingly, on a two-year basis, gold and bitcoin have performed almost identically, though of course with moves of vastly different timing.  Bitcoin still retains much of its pre-election runup, if not its post-inauguration move.  Gold has moved higher at a rapid, but linear clip, though silver continues to outpace both, today’s plunge notwithstanding.

2-Years, December Silver (red/green daily candles), December Gold (yellow line), Bitcoin (blue line)

Source: Interactive Brokers

Today was undoubtedly a wild one for silver traders.  For better or worse, silver remains well above its moving average and peers.  This move must have shaken out some of the most significant excesses in those markets, but the dip has still not brought us back to prevailing trends.  We could still get a fair-sized correction while still maintaining the commodity’s uptrend.

[i] Of course that refers to my favorite holiday-adjacent movie, Trading Places, and the activity in frozen concentrated orange juice futures on the old NYMEX when the Duke Brothers thought they stole the crop report.  We deconstructed the goings on in that movie a few years ago in this piece from December 2021, which then led to a podcast with IBKR’s founder and Chairman, where he discussed his role in the movie’s genesis.