Silver Bides Its Time Before Significant Price Action Returns

Silver Bides Its Time Before Significant Price Action Returns
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In 2016, silver traded in a range from $13.73 to $21.095 or $7.365 per ounce. In 2017, the band was from $15.15 to $18.655, $3.505 or less than half the width of the prior year. Silver had reached a low of $15.135 and a high of $17.705, $2.57 or just under $1 narrower than the range in 2017 until mid-August when it fell through the $15 per ounce level for the first time since 2016. The precious metal reached a low of $14.315 on August 16.

Silver has a long history as a volatile commodity, and the leader of the precious metals sector when it comes to percentage gains or losses. The price action in the silver market reflects the state of affairs in precious metals these days as they have all drifted to their lowest level of this year recently and remain near those lows.

Higher interest rates, a stronger dollar, and fears surrounding trade issues with China have all added up to a potent bearish cocktail for silver and the other members of the precious metals sector. Meanwhile, price volatility had declined to a level that was unsustainable meaning that a significant price move to the up or downside was coming sooner, rather than later. The move turned out to be to the downside.

Source: CQG

The monthly chart of the price of silver shows that the precious metal has been in a downtrend since trading at $49.82 in April 2011. The 2011 high was only 54 cents shy of the all-time nominal peak of $50.36 in January 1980, almost four decades ago.

As the chart highlights, monthly historical volatility had declined to under 10 percent. The last time the metric that measures the price variance was below that level was back in January 2001. Silver had been as the price has declined slowly and steadily. The recent move to the downside moved the measure of price variance back over the 10% level.

The silver market is like a rubber band. When you stretch that band, it becomes thinner and thinner until it eventually snaps. Silver volatility is like that rubber band, and that eventual snap typically results in a significant move that caused the volatility measure to explode to the upside. In 2011, it rose to over 63 percent, and following the Brexit referendum in June 2016, it moved north of the 30 percent level. The downside prospects for the measure of price variance in the silver markets are low these days compared to the upside potential.

Volatility can jump higher in the silver market on the up or downside. Many commodities take the stairs up and the elevator down meaning that price variance tends to explode during sudden price corrections to the downside. However, silver is more of an equal opportunity market as price variance can explode in either direction.

A continuation of the lowest volatility level in almost two decades is a sign that the price of silver will not remain around its current price for long. While many market participants have ignored silver because of its declining range and price level, this could be the perfect time to put the precious metal on your radar. Trading silver has offered market participants lots of opportunities over the past four decades, and low volatility could mean that it is just a matter of time before the metal awakes from its multiyear period of volatility hibernation. 

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