(Kitco News) - Silver prices continue to consolidate after briefly hitting a 12-year high of $35 an ounce at the start of the week. Although the market has found initial resistance at $34 an ounce, a growing number of analysts expect that the precious metal still has room to rally.
However, some analysts note that bullish investors should be paying attention to factual bullish factors and be careful not to get sucked into false narratives. Two of the biggest myths propagated by "#Silversqueeze" proponents are that the futures market is a fabrication of demand because there are more paper contracts in the marketplace than there are physical ounces.
While this is a true function of the marketplace, many analysts note that the majority of commodity trading, not just in the silver market, is settled in cash or simply rolled over. Some analysts have pointed out that many speculators in the marketplace wouldn’t want to take physical ownership of their silver because they don’t have the proper facilities to secure the precious metal.
“You can’t just take delivery and store it in your garage,” one trader said in an interview with Kitco News.
A second myth circulating in the silver market is that bullion banks have been short-selling the metal and are now sitting on trillion-dollar losses. The myth also suggests that banks try to manipulate the market to suppress prices and minimize their losses. Many retail investors, after seeing the meme stock phase in 2021, tried to put the same short-squeeze pressure on the silver market; however, these investors found out that the silver market has much more liquidity than stocks like GameStop.
“Reports that banks are holding massive losses on their silver shorts are erroneous, but this belief led to more than 100 million ounces of ETF inflows in 2021,” said Daniel Ghali, Senior Commodity Strategist at TD Securities.
Analysts have said that many bullion banks are short silver not because they want prices to go down, but because they are hedges against long positions in other derivative markets, like exchange-traded funds.
In his updated note Thursday, Ghali reiterated his call that the "#Silversqueeze" is real, but it's just not what investors think it is. He explained that investors should be paying more attention to physical silver holdings and above-ground stocks. As these resources get depleted, prices will have to go up, he added.
Ghali said that if the silver market were to see similar inflows as in 2021, inventories in London Bullion Association vaults could be depleted by one-third.
“The legitimate case for a #Silversqueeze you can buy into is rather associated with the drawdown in inventories amid structural deficits and pressure release valves that are showing no signs of being triggered at current prices."
TD Securities is also bullish on silver as the Federal Reserve’s new easing cycle is expected to push bond yields and real yields lower, which in turn should weaken the U.S. dollar.
TDS is also bullish on silver due to strong industrial demand for the precious metal. This is particularly true because silver remains a critical metal in the green energy transition.
TDS isn’t alone in its bullish outlook. According to a survey during the London Bullion Market Association’s 2024 Precious Metals Conference, delegates expect silver prices to reach $45 an ounce in the next 12 months.
Although many see silver’s rally as just getting started, analysts also urge investors to use caution and warn they should expect to see some volatility.
Alex Kuptsikevich, Senior Market Analyst at FxPro, said in a recent note that while he is bullish on the precious metal, momentum indicators are starting to turn.
“The Relative Strength Index (RSI) has surged above 70 on the daily chart, indicating that silver may be approaching ‘overheated’ territory,” he said.
At the same time, he also sees any weakness in the silver price as a buying opportunity.
“The next potential upside target for silver looks to be the $35 area, where the 2012 rally ended after the 2011 sell-off. However, a potential shakeout of short- and medium-term bullish positions in the $32–$35 range could pave the way for long-term buyers to step in decisively. This shift may set the stage for silver to target a new all-time high, potentially surpassing the $50 mark,” he said.
