Is the Price of Silver Signaling the Next Monetary Supernova, or Will it be the Cause?

If the pricing in the world’s commodity and financial markets accurately reflected anything but the culmination of decisions made by high frequency trading systems, then the recent price action in the silver market might have something meaningful behind it. In an alternative parallel universe, the recent rally in silver might actually be ‘pricing in’ the next major monetary event.

The Fed’s second round of quantitative easing was announced on November 3, 2010. Nevertheless, the price of silver had failed to break through the psychological $20 level by mid-September of that year, after having been stuck trading around the $18 level for what had seemed like an eternity to most traders.

The Technical Picture Shows Silver Approaching Key Trendline

The series of charts below show silver’s price action over each year from 2009 to date. In recent months, silver has been consolidating within what looks like a descending triangle pattern that is now approaching its apex.

Silver’s price has also just pushed above a long term downtrend line that forms the declining top line of this triangle pattern, which is drawn through the successive highs seen on April 24^th, 2011 and February 26^th of this year. If its current $30.13 level is broken convincingly to the upside, this trendline will then provide support for a rally even higher in silver.

What Does This Silver Price Action Signify?

Although no one really knows where the price of silver is headed in the short term, the recent near term trend has been quite bullish for silver. As much as it feels as though it is about time for silver to make a substantial move, most of you should be pre-conditioned for what might come about as early as tomorrow or next week.

Sentiment in the silver market has been soft for many months, and it will probably remain fragile over the coming month. Furthermore, open interest in silver contracts has increased steadily; even as open interest in gold futures has fallen. In addition, the net short of the four largest banks has increased as well. This means plenty of room exists to trigger a sharp sell-off, as the market has seen before.

Although the price of silver will someday pass through its fair value based on supply and demand fundamentals, it is unlikely that this appreciation will happen gradually or in an orderly manner.

Any meaningful upward trend in silver will surprise everyone, including those of us who have been studying and following the day-to-day price action and news in silver for years. While it is difficult to not feel optimistic about silver in the short term, since for the price of silver to take off without any news feels quite constructive. Nevertheless, no one really knows.

Silver’s Price Pushes Above Key Moving Averages

It seems just as easy to blame the rally in silver on a computer glitch ‘working the other way’, than on a closely followed technical indicator like the 200-day Moving Average. Nevertheless, the price of silver is now trading just above its key 200 day Moving Average, which currently reads above the $30.50 level. A sustained break above that closely watched indicator can signal many longer term silver traders and fund managers to enter the silver market on the long side.

Speaking of technical indicators, the short term moving averages have also been exceeded, as was the 100 day average. Silver also broke above psychological resistance at the $30 level. Of course, this is how the professional traders make their living by watching technical signals like these.

In the trading world, the market is now approaching an inflection point where momentum and human emotions start to influence the market-driven pricing dynamic. Real supply and demand — and the undeniable existence of manipulation and control in the silver market are apparently forgotten — for now at least. The ‘house’ is starting to rock.

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