Silver price tumbles as open interest smashes its 2014 low

Silver price has defied logic today. The price is off by more than 1.50% which is controversial because most metals have soared today. It also defies logic because the dollar index has declined by more than 40 basis points today. Further, the price has declined even as the overall market remains relatively optimistic about the opening of the economy.

Silver following gold downwards today

The price of silver has partly because its big brother, gold, has also declined by almost one per cent. In the past, silver tends to overreact to what gold does. The main reason, why we believe gold has dropped is that money has moved from risk assets to high-yielding stocks as the coronavirus situation normalises. In fact, the VIX index is trading at the lowest level since March.

As I wrote earlier, the Dow Jones industrial average, has continued to soar. The same is true with other major indices like the DAX, FTSE 100, and CAC 40. In most cases, when this happens, the price of gold and silver tend to decline.

In reality, silver, which is an industrial metal should be rising today. Furthermore, American states have already started to reopen their economies. Many countries in Europe and Asia are also starting to reopen. In theory, this means that there will be more demand for the metal.

The real reason why silver prices are falling

While these are valid reasons, I believe that the main reason why silver price is falling is that there is simply no demand. A good way to look at this is to consider the open interest. This is a number that is released by The Commodity Exchange (Comex). This data usually shows the number of long and short positions in the futures market.

As you probably know, the silver market tends to be highly speculative. Most participants in the market trade in the metal as an indirect way to participate in the gold market. In fact, studies have shown that silver is usually more volatile than gold.

An interesting thing has just happened in the silver market. Its open interest has just dropped to its lowest level since January 2014 as shown on the chart below.

Silver Open Interest

Silver Open Interest

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Silver price technical analysis

Looking at the four-hour chart, we see that silver price has consolidated around the 50-day EMA. This price is also slightly below the 50% Fibonacci Retracement level. At the same time, its volatility, as showed by the Average True Range (ATR), has declined to the lowest level since March 6. We also see that the price is attempting to resist moving below $15 per ounce.

Therefore, if the price manages to move below this level, I expect bears to target the $14.50 support. This is an important psychological level that is also the swing low that was reached on April 21st. If the $14.50 is breached, it will be a matter of time before bears attempt to retest the $14.00 level.

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