Silver Turns Bullish As China Piles Up Reserves
The price of precious and industrial metal Silver fell approximately 27% to $13.61 in 2015, before recovering to hit $15.5 in March 2016. While the yellow metal continues to forge ahead in an unabated manner, silver continues to meet heavy resistance from short-sellers.
In fact, the short-sellers successfully pushed silver below $15 in the last week of February, thereby bagging the premium from writing call options.
However, major think tanks believe that short-sellers will get trapped this time because of the following reasons.
The rout in the commodity prices continues to force several mines, including the ones producing zinc and lead, to shut down. Silver is usually a byproduct of zinc and lead mines. Thus, closure of zinc and lead mines would soon result in a dire shortage of silver, thereby resulting in an uptrend in price.
D Rutter
Furthermore, unlike gold, silver is also an industrial metal widely used in semi-conductors, batteries, solar power devices and medicines. Thus, demand continues to grow year after year. Shutdown of mines will create a shortage quickly and will push the price to very high levels.
Invariably, all the major central banks own a considerable quantity of gold. Thus, shortage, if any, can be met through supplies from a central bank vault. However, silver is no longer owned by any central bank. Thus, sharp price rises cannot be halted easily. Between gold and silver, the former is the strongest when it comes to the price rise.
Silver is certainly weaker and follows the yellow metal as far as the uptrend or downtrend in price concerned. The price of gold has increased by more than $150 per troy ounce in the past one month. However, silver is yet to display such a strong rise in price. The price ratio between gold and silver is often monitored closely to forecast an uptrend or down trend in the price of both metals. Historically, the price ratio usually declines after hitting a peak of 80. The price ratio of gold and silver is currently near 80.
Thus, for the probable decline of the price ratio, logically, given the economic slowdown, the price of silver has to increase.
Finally, it should be remembered that China recently joined LMBA silver benchmark-setting process. The entry of China Construction Bank in the benchmark-setting process has resulted in offering Chinese Renminbi futures contracts with physical delivery of silver in London. Additionally, China purchased about 345.1 metric tons of silver, thereby increasing its reserves by 175% in the first-quarter of 2016.
Technically, as shown in the image below, the price action has resulted in the formation of the cup and handle pattern in the chart. It should be noted that gold completed the rounded bottom pattern in January before rising sharply.
Thus, we can expect the price of silver to rise strongly and reach $18.20 in the coming weeks. So, a binary options trader should purchase a call option contract with March end expiry. The suggested strike price for the call option contract is $16.50
