Silver Breaks Down on Gold, China

Many traders' appetites for precious metals have greatly diminished, resulting in sharp selling in Silver. Silver prices felt pressure as both a precious and industrial metal. Base metals prices have fallen off sharply, with Nickel trading at 8-month lows,while Copper is at 18-month lows. Chinese industrial production has been slowing, which will likely hurt demand for Silver used in electronics. Fears that central banks may be swapping precious metals reserves in favor of currency has created a sense of panic among some metals traders afraid of catching themselves on the wrong side of the market. The wave of selling could trigger some value buying in Silver. However, traders buying on leverage in futures and Silver ETFs on margin suggest longs could be skittish.

Fundamentals

Silver dropped 11% yesterday, falling to the lowest level since October 2010. The metal was facing assault from all sides, as Chinese growth slowed to 7.7%, US equity prices slumped, and supply and demand fundamentals have loosened. Certainly, the tragic event in Boston did little to help equity and commodity markets after the negative tone had already been set. Economic data from China continues to show a pattern of weakening, which suggests industrial use for the metal will decrease. Furthermore, slower Chinese growth could very well lead to lower global inflation, curbing demand for the metal as an inflation hedge. There are concerns that Cyprus may sell its Gold holdings. In and of itself, Cyprus selling their Gold reserves would not have a major impact on the physical market. However, this move could hint at wider spread monetization of Gold reserves by central banks. At the same time, many investors are decreasing their holdings of Gold ETF positions to their lowest level in almost three years. SLV inventories have held up surprisingly well, but that could change quickly if prices continue to head south.

Technical Notes

Turning to the chart, we see the May Silver contract in a free-fall after breaking support near the $26.65 level. Prices are well into technical bear market levels, which could make fresh long positions few and far between, and could easily shake the resolve of those who decide to test the long side of the market. The next significant support level comes in near $19.25. The two-day plunge resulted in the RSI moving from neutral to very oversold conditions, which could trigger some short-covering and profit-taking.