Silver (XAG) Forecast: Supply Deficit Drives Rally Over $79—Analysis Shows Reversal Risk

Spot Silver Soars 18% to Record High on Thin Post-Christmas Volume

Spot Silver prices soared 18.08% last week to close at $79.31. Most of the gains took place on Friday when buyers took advantage of thin post-Christmas volume, taking out weak bids on their way to another record high and close.

I may have misspoke when I said “buyers” because I don’t know if it was one large buyer taking out the offers or a group of buyers. It was pretty smooth price action. I don’t think anyone was getting short so there must have been a lot of profit-taking.

Watch for Closing Price Reversal Tops at Record Highs

When a market is cruising at all-time highs, there is no resistance, only technical protections. Therefore, the topping chart patterns become more important. My go-to pattern following a prolonged move up in terms of price and time is the closing price reversal top. It’s not the typical higher top, lower close, but also a close below the mid-point of the day’s session and the opening.

You’re not trying to pick a top with this formation and it’s not going to lead to a change in trend. In this case, if it takes place, it’s because the market needs to alleviate some of its upside pressure. Some traders prefer to use oscillators to predict overbought markets, but they are coincidental indicators. A valid closing price reversal top tends to be a better indicator of an overbought market because you can actually see the market turn from buyers to sellers.

Trading Strategy for Thin Holiday Markets

This week, we’re going to see more thinly traded markets except maybe Monday because of the volatile mess created on Friday. Pay attention to last week’s close at $79.31 all week because this will tell us if it is gaining or losing. This price should act like a pivot. Be careful buying strength and selling weakness during low volume periods.

Long-term investors are more likely to ride out the volatile swings than short-term speculators. The short-termers should be working on their exit strategies because if you don’t know your exit when you’re in a position or when you are looking to buy, the market will usually tell you and it’s usually an expensive proposition.

The Real Driver: Supply Deficit, Not Geopolitics

As far as the fundamentals are concerned, almost every story I read over the weekend said it was geopolitics and Fed rate cuts driving the price action. I’m not buying that at all. I’ve seen interest rates approach 0% and silver barely moved. We’ve also seen wars and military conflicts for years—Russia and Ukraine, Israel and Hamas, bombings in Iran. I think it’s old school thinking to assume that geopolitics was behind the rapid advance on Friday. It may help put in the floor, but speculators aren’t buying on the headline.

This rally is all about supply and demand. All you have to know is there is a deficit and the U.S. declared silver a strategic metal. Now we know this can’t go on forever, supply will eventually rebuild. It could be new mining or some new source of supply that no one is thinking about. When silver topped in 1979-80, Comex raised margins and married couples sold their wedding gift silverware at the local Holiday Inn. There were also reports of people dumpster diving for X-rays in order to capture the silver in the film.

This current rally was launched from $45.55 the week-ending October 31. On November 6, the US Geological Survey (USGS) officially added copper and silver to the critical mineral list. Over the long-run, that’s all the bulls need to know. Short-term swing traders and nervous Nellies can watch the Fed and geopolitics.

More Information in our Economic Calendar.