Forex Trading Silver
Silver has put together a back-to-back days of sizable rallies, and is now at $32.40 at the time of this writing. Let’s take a look at some of the factors that may be driving silver up in this rally:
1. Silver is in backwardation. Backwardation is the condition in the futures market in which contracts for settlements in future months are trading at a lower price than near-term contracts. In other words, traders are paying a premium to receive the contract sooner. To put it simply, they want the underlying asset now. Backwardation in silver extends all the way out to contracts due for settlement in 2015. The onset of backwardation is cited by those who believe that JP Morgan and HSBC have put on short trades for which they do not have the underlying asset — i.e. naked short selling — in the silver market as a sign of bulls forcing JP Morgan and HSBC to close their positions. As Morgan and HSBC, both of whom have been hit with class-action lawsuits for fraudulent manipulation in the silver market, exit their short positions, silver may rise significantly. Accordingly, those in the silver market may wish to pay attention to criminal proceedings against Morgan and HSBC, as such proceedings may impact the presence of short positions that have had the effect of keeping the price of silver down.
2. Open interest has been rising slightly, which may be a sign of new bulls entering the market even as shorts get squeezed out.
3. Silver has come off a multi-week period of consolidating its previous gains, so this may leave it free for the next leg up, according to common technical analysis theories.
In terms of entry points, I personally recommend buying silver and holding it for the long-term, with $50 being the first major price target. For those who wish to allocate a portion of their proceeds for short-term trading, I would look for a pullback to approximately $31.50 — a previous swing high price level — as a price level to enter at.
Simit Patel is the founder of InformedTrades.com, a site dedicated to helping individuals learn forex trading. The site features a number of free courses from community members and forex professionals like Nial Fuller.
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