Silver (XAG) Forecast: Silver Rally in Jeopardy as Market Targets $71.31 and Possibly $59.34

Silver Resumes Sell-Off After Brief Two-Day Pause

Spot Silver is sharply lower on Thursday as last week’s rout resumed after a two-day reprieve. The selling is likely being fueled by weakness in the gold market. Silver showed weakness on Wednesday when it failed to follow gold into the 50% to 61.8% retracement zone at $96.49 to $102.43.

The market is currently trading on the weak side of a retracement zone at $83.61 to $74.63 as well as the 50-day moving average at $77.07. That leaves only one price left as potential support, the swing bottom at $71.31.

At 16:42 GMT, XAGUSD is trading $76.99, down $11.31 or -12.83%.

$71.31 Swing Bottom Is Last Line of Defense

Taking out $71.31 will change the trend to down according to the daily swing chart. This move will put the 200-day moving average at $49.82 on the radar.

Strong Dollar and Fading Tensions Cited as Catalysts

Besides the weakness in gold, some analysts are blaming the sell-off on a strong dollar and fading geopolitical tensions. Thin liquidity is also being cited as a reason for the selling pressure.

Stubborn Longs Finally Capitulate

In my opinion, stubborn long traders who held on during the first break are finally dumping positions as the market continues to look for value. This may include the December 5 top at $59.34, which some say is the original trigger point for the breakout to the upside. Another potential support price is the psychological $50.00 level. These are valid targets since there is no real support under the 50-day moving average at $77.07 except the 200-day moving average at $49.82.

Market Sits at Dollar-Wide Line in the Sand

With today’s low at $72.31 and the weekly low at $71.31, the market has essentially reached the proverbial “line in the sand”, albeit a dollar wide line. Not only is it important to hold support, but the market will have to close on the strong side of the 50-day moving average in order to give the second bottom some credibility.

Pandora Shifts to Platinum Amid Silver Volatility

Compounding the sell-off in spot silver is the drop in the iShares Silver Trust (SLV). A potential decline in demand could also be behind the sell-off after Jeweler Pandora announced its moving some designs to platinum plating to dodge the wild swings in silver costs, according to Reuters.

Too Many Reasons, Not Enough Buyers

There are numerous reasons for the sell-off. When a bull market falls apart as fast as the silver market has, analysts come up with various reasons for the weakness in an effort to rationalize it. I like to revert back to more sellers than buyers because there are so many players with so many reasons why they don’t like silver at this time. The key is to find a credible source with a credible reason. If you are trading momentum, however, the reason for the price dump doesn’t really matter.

China Speculation Angle May Explain the Speed

Personally, I like Bloomberg’s idea that China is behind the sell-off due to excessive trading by speculators. Although gold is down today, its relative stability is likely leading to an orderly sell-off. The more thinly traded silver, however, is more volatile and more vulnerable to a break that wipes out an entire two-month rally.

More Information in our Economic Calendar.