Silver ETFs Surge From Chart Support

Government infrastructure spending supports industrial demand

Silver front-month futures jumped 7% from crucial chart support Tuesday as bargain hunters stepped in after the commodity fell to a nine-week low earlier this week. The grey metal also benefited from a weaker dollar, making it cheaper for foreign buyers to purchase. The U.S. dollar index (USDX), which measures a basket of major currencies against the greenback, set a new 52-week low yesterday to trade at its lowest level since mid-2018.

Key Takeaways

  • Silver prices rallied sharply from crucial chart support after falling to a nine-week low.
  • The iShares Silver Trust (SLV) has formed a descending triangle, with buyers defending the pattern's lower trendline.
  • A descending triangle on the ProShares Ultra Silver (AGQ) chart finds a confluence of support from a horizontal trendline and the 200-day simple moving average (SMA).

As well as its safe-haven appeal, silver stands to benefit from improving industrial demand as governments invest in infrastructure spending to stimulate economic growth after the pandemic. During the election campaign, President-elect Joe Biden called for $2 trillion of infrastructure investment over the next four years.

Investors can gain silver exposure through these two exchange-traded funds (ETFs) that specifically track the commodity's price. Below, we review each fund and use technical analysis to point out important trading levels.

iShares Silver Trust (SLV)

Launched in 2006, the iShares Silver Trust (SLV) aims to generally reflect the performance of the silver price by holding silver bullion in London. The fund's exposure to the metal provides a straightforward way for silver bulls to play fluctuations in the commodity's price. What's more, nearly 25 million shares exchange hands each day on average penny spreads to provide ample liquidity. As of Dec. 2, 2020, SLV has enormous net assets of $13.22 billion and is trading almost 15% lower over the past three months. However, it has gained 33.69% since the first trading day of the year.

After trending 152% higher between the March low and August high, the ETF's price has formed a descending triangle during a two-month retracement. At this stage, buyers have successfully defended the pattern's lower trendline at $20.50 – a move that may lead to further gains in subsequent trading sessions. Those who take a long position after Tuesday's rally from this closely watched support area should book profits on a retest of the triangle's apex at $27.39. Think about protecting capital with a stop-loss order placed beneath the September low at $20.45.

Chart depicting the share price of the iShares Silver Trust (SLV)

A long position means a trader has bought and owns shares of a stock or fund, with the expectation that they will rise in value.

ProShares Ultra Silver (AGQ)

With assets under management (AUM) of $634 million and a 0.95% management fee, the ProShares Ultra Silver (AGQ) seeks to provide two times the daily return of the Bloomberg Silver Subindex. The benchmark tracks the performance of silver bullion as measured by the fixing price, in U.S. dollars, for delivery in London. Traders should note that returns may deviate from the fund's stated leverage due to the effect of compounding. A daily turnover of 1.3 million shares, coupled with a competitive 0.10% spread, allows aggressive short-term bets on the silver price while keeping transaction costs manageable. AGQ has tumbled 40.29% over the past three months but returned 34.76% on the year as of Dec. 2, 2020.

Like SLV, the fund's share price has traded within a multi-month descending triangle, with the pattern's base finding a confluence of support at $36 from a horizontal trendline and the 200-day SMA. A sharp rally from this level in Tuesday's session has the potential to trigger a short-covering rally that may propel the price back toward the 52-week high at $71.60. Active traders who enter in this area should limit downside risk with a stop located under last week's low at $36.31.

Chart depicting the share price of ProShares Ultra Silver (AGQ)

Short covering refers to buying back borrowed securities in order to close out an open short position at a profit or loss. It requires purchasing the same security that was initially sold short and handing back the shares initially borrowed for the short sale.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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