Silver retreats from record high on overheating concerns

SILVER retreated from a record high on Tuesday (Dec 2), with a key technical indicator showing that a six-day rally has taken it into overbought territory. Gold also edged down.

The white metal fell as much as 2.4 per cent to around US$2 below the all-time peak reached in the previous session. Traders have been betting on continued supply tightness and expectations for another interest-rate cut in the US, a tailwind for non-yielding precious metals.

The 14-day relative strength index, however, showed that this recent speculative fervour may have gone too far, too fast. A reading of above 70 shows that the momentum is overheated.

“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 indicates how many ounces of silver are needed to buy one ounce of gold, has also fallen to the lowest in more than a year – another indicator that silver has run ahead of itself. Traders sometimes see such extremes as turning points.

The rally in silver – which rose more than 8 per cent over the previous two sessions – has been fuelled by bets on prolonged supply tightness. Since record amounts of the metal flowed into London to ease a historic squeeze in October, other trading hubs have come under pressure. Inventories linked to Shanghai Futures Exchange’s warehouses also recently hit their lowest in a decade.

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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 1.8 per cent to US$56.9579 an ounce as of 10.26 am in Singapore. Gold edged down 0.3 per cent to US$4,218.35 an ounce. The Bloomberg Dollar Spot Index was up marginally, while platinum fell slightly. BLOOMBERG