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Silver Futures Collapse in Early Trade, Silver ETF Demand

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Silver futures are down 2.44 percent in early trade, following a 3.82 percent decline on Friday. A paradox forms.

Christopher-LemieuxSMBullion.Directory precious metals analysis 21 September, 2014
By Christopher Lemieux

Senior FX and Commodities Analyst at FX Analytics

Precious metals are broadly lower heading into early Monday trade, as silver declines another 2.44 percent. An overly optimistic interest rate outlook has kept the US dollar elevated, keeping pressure on the commodities complex. 

However, there is a new paradox forming as future prices collapse. There is still a large demand for silver exchange-traded funds (ETFs), regardless of the price declines. Retail investors are taking advantage of the lower prices and establishing positions in silver. According to Credit Suisse, there is a perception that silver will outperform gold as the economy strengthens (assuming that it will). This is largely due to the fact that the majority of silver’s demand is industrial, and it correlates more with economic progress than inflation.

There is a divergence in gold and silver-backed ETFs. Gold ETFs are held predominately by hedge funds and large speculators, but these positions are being rapidly unwound with the hope of higher interest rates and more economic growth. $6.7 billion has been erased from the value of gold ETFs on the largest investor outflow since June. Silver ETF holders are primarily retail investors, and there is a buy-and-hold mentality. The US-based silver ETF market is comprised of 80 percent retail investors.  According to Reuters, the largest six silver ETFs have seen a 104 ton inflow last week, boosting total holdings to 17,135 tons.

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The weekly chart is showing that price is oversold with an RSI of 30, but the trend remains strong. Price action looks to be in a demand zone, with the lower bounds at near-term support of $16.77 per ounce (blue shaded area). A break through this area and silver will likely have a 15-handle. If the demand zone holds, silver will have to re-challenge $18 and two mini-descending trends (yellow trend lines) before it picks up any upward momentum.

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