Spot silver daily candle chart - 16th November 2010

Friday’s wide spread down candle on the spot silver daily chart was triggered by the fundamental news from China that inflation was continuing to take a firm hold in the Chinese economy, raising fears of a second and subsequent interest rate rise in an attempt to prevent the economy from over heating. In the event, the People’s Bank of China kept their rates on hold for the time being, but markets continued to react negatively once again yesterday on fears that demand from China for industrial metals such as silver and copper may slow over the next few months.

From a technical perspective, the move lower last week came as no great surprise, as we had already forecast this short term reversal for the commodity following the strongly bearish signal on Tuesday of a significant shooting star candle, which could only see the silver market move one way – lower! This of course happened on Friday, with yesterday’s narrow spread down candle continuing to echo Friday’s nerves, with a close and hold below the 14 day moving average on the daily chart. As outlined in last week’s market report, we suggested that spot silver could re-test the $25 per ounce level during this short term retracement, and this may well be the case in due course, but if so, I expect to see this platform hold firm and provide the springboard for a recovery in due course, and a continuation of the longer term upwards trend. In the short term of course, we need to see spot silver climb back above both the 9 and 14 day moving averages to re test the underside of the $27 per ounce price area, and a move through here should see a move beyond the $28 per ounce region once again which will then provide a secondary platform for a further leg up in the longer term trend.

Many analysts are now suggesting that commodities have peaked and will fall far and fast – I am not one of them, and indeed since starting this market commentary some years ago, I have been calling silver higher since it was languishing at a few dollars per ounce. My long term outlook for the metal remains firmly bullish, and last week’s volatile price action will soon be absorbed by the market as the trend returns to continue higher in a more measured way in due course.