Silver (XAG) Forecast: Parabolic Silver Rally Hits $112.20 Record High

Silver Soars to Record High as Speculative Frenzy Intensifies

Spot Silver continues to soar on Monday, hitting another record high at $112.20 with buyers not showing any signs of letting up. This isn’t just traders buying because of a supply shortage either. This is relentless speculation with the buying tied to momentum, not support, resistance or news.

At 14:22 GMT, XAGUSD is trading $111.91, up $8.52 or +8.25%.

Vertical Rally Disconnects from Traditional Technical Support

The vertical move the past three sessions has pushed silver prices further away from the uptrend line that had been providing support and smooth guidance since the bottom at $48.64 on November 21. For about 32 sessions, it averaged gains of about 80 cents per day. Since December 31, gains have been measured by dollars per day. However, since last Thursday, we’re looking at a whopping $6.85 per session.

There is no resistance at record highs so it’s very difficult to figure out at what level it will be too expensive. With that the case, it seems like some surprise outside factor may be necessary to stop the rally from blowing up the market even higher.

The Substitution Factor: Silver’s Industrial Demand Test

Like any commodity, whether soybeans, corn or live cattle, there is the potential for substitution. Econ 101 taught us that if coffee prices got too high, people switched to drinking tea. If this rally continues to climb at this torrid pace then industrial buyers may be forced to find a cheaper substitute, but performance may suffer. Some low performance substitutes include copper, aluminum, nickel or zinc. But in a lot of high-performance applications, silver won’t get fully replaced, buyers will just use less of it.

Supply Constraints: Why Miners Can’t Just Dig More

When traders see a silver market go vertical, one of the first things they think about is the miners and they probably ask, why don’t they just mine more silver? The short answer: silver supply can’t ramp up fast because most silver isn’t mined as “primary silver”. It’s mostly a byproduct and the mining cycle is slow.

What Could Stop This Rally?

While we’re definitely not picking a top yet, we are aware of what can cause a top or what will indicate a top is forming. Fundamentally, more supply and lower demand will cap gains. But if the extra supply can’t be mined fast enough, it will probably have to come from the moms and dads out there who are looking to make a quick buck by selling their wedding gift sterling silver flatware. It’s the little things like this that can topple a market much like it did in 1979-1980 along with 100% margins.

And speaking of margins, the current volatility we are currently witnessing is much steeper than what we saw during the last week in December, when the Chicago Mercantile Exchange raised margins twice in a week. So I’m going to go out on a limb and say, we’re going to see a margin hike, but will it be large enough to stop the rally and trigger a downtrend? Probably enough to put in a short-term top but not a change in the trend unless it’s 100%.

Trading Strategy: Watch for Reversal Signals

Into the close today, remember that the trend is your friend, but start watching for closing price reversal top formations, starting with the five-minute chart. We’re dealing with some pretty aggressive herd trading so if the herd sees a reversal top on an intraday basis, the herd could start selling.

More Information in our Economic Calendar.