Veriton Investment

Silver Slips From Record on Signs 6-Day Rally Had Run Too Far

(Bloomberg) -- Silver retreated from a record high, with a technical indicator showing that a six-day rally pushed the metal into overbought territory. Gold also slipped.

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The white metal slid as much as 2.4% before paring some losses in US trading. Traders have been betting on continued supply tightness and on expectations for another US interest-rate cut — a tailwind for nonyielding precious metals.

Viewed through the 14-day relative strength index, a gauge of overbought conditions, silver tipped above 70, a level often seen as an indication that momentum is overheated.

Silver is seeing a “natural pullback,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. But he added that the broader trend remains intact as long as prices hold above $54.5-$55 an ounce.

The metal’s more-than-8% surge over the previous two sessions has been fueled by wagers on prolonged supply tightness. Since record volumes of silver flowed into London in October to ease a historic squeeze, other trading hubs have come under pressure. Inventories linked to Shanghai Futures Exchange warehouses recently fell to their lowest in a decade.

“We have now moved on beyond rational momentum,” Daniel Ghali, senior commodity strategist at TD Securities, said in a note. “Demand expectations have declined across all categories, leaving investment demand as the primary driver today,” he said, citing weak physical trading in London’s over-the-counter market.

The gold-silver ratio — which shows how many ounces of silver are needed to buy an ounce of gold — has also dropped to the lowest in more than a year, another indication the rally may have run ahead of itself. Traders sometimes view such extremes as potential turning points.

Bullion has also been supported by rising expectations that the Federal Reserve will deliver another interest-rate cut next week. Markets have priced in a near-certainty of a quarter-point reduction at the Fed’s final meeting of the year.

Silver fell 1.4% to $57.14 an ounce as of 10:55 a.m. in New York. Gold fell 1.4% to $4,174.29. The Bloomberg Dollar Spot Index was little changed. Platinum fell while palladium advanced.

--With assistance from Yvonne Yue Li.