Silver: A Rally Built on Sentiment, Not Substance
Silver: A Rally Built on Sentiment, Not Substance
The metal appears overheated: Here’s a technical and fundamental case for fading the hype
- Silver’s recent surge has outpaced its fundamental and industrial backing.
- Meanwhile, economic softness and global uncertainty are making industrial demand for the metal less reliable.
- Compared to gold, silver appears stretched and speculative.
- I’m targeting a short setup through out-of-the-money call selling after this week’s rally.
Silver has had a notable run over the past few weeks, tracking much of gold’s upward momentum. But the reasons behind its rally differ. Gold is clearly benefitting from its role as a safe haven amid mounting political pressure, inflation anxiety and a weakening dollar. Silver, however, is caught between being a precious metal and an industrial commodity—and that’s where the disconnect lies.
A recent Reuters article noted this: “Gold’s surge has been driven by genuine fear and flight to safety. Silver’s move, while notable, appears to be more speculative than defensive.” That says it all. While gold is being bid up as a hedge, silver is being chased—and there’s a major difference.
Silver's heavy use in industrial applications like solar panels, electronics and semiconductors ties it closely to economic output. With U.S. tariffs increasing against Mexico, China and Canada, global trade is under stress. That puts real pressure on the demand side of silver, and investors should be factoring that in.
Technicals tell a story of exhaustion
Viewed through a technical lens, silver looks tired. The relative strength index (RSI) has been sitting above 70, a level historically associated with overbought conditions.
Price is now approaching major resistance levels from previous failed rallies, and volume is thinning, even as price pushes higher. That’s a sign of weakening conviction.
The gold-silver ratio, which compares the relative value of the two metals, is hovering near 92:1—an unusually high level that suggests silver may be overvalued relative to gold. A strategist quoted in ETF.com says “when this ratio stretches this far, silver typically underperforms shortly after.
It’s a clear signal for rotational trades.”
My approach: Selling into the hype
With this backdrop in mind, I’m not looking to aggressively short silver via futures. Instead, I’ll be selling out-of-the-money calls, targeting strikes above this week’s highs. The setup is simple: Implied volatility is high and sentiment is stretched.
This approach benefits from high option premium from the recent move; defined risk and a wide margin for error; and profit if silver consolidates, fades or even stalls near current levels.
It’s a non-directional way to trade the expectation of cooling momentum, and I prefer that over guessing a top.
Final word: Fading strength with strategy
Silver’s move has been impressive, but it’s likely built more on hype than hard data. Industrial demand faces serious headwinds, technical indicators flash red and relative value vs. gold is out of sync. This creates a solid short-term window for traders to fade the strength.
Markets don’t always fall when they’re overbought, but they often slow down. And for a strategy like selling call options, that’s all I need.
Errol Coleman appears on the tastylive network shows Today’s Assignment and Trades on the Go.
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