Markets
Silver at ₹ 1 lakh—your battle plan ahead
Summary
- There are commodities, and then there’s silver—unique in its price discovery. On Tuesday, silver hit ₹1 lakh per kg on the MCX, making history. But what works for other commodities won’t work here. Let’s explore what will.
I have consistently advocated a bullish stance on silver (read more here and here), expecting it to breach ₹1 lakh—and higher—by 2025. My logic hinged on the US elections concluding on 5 November 2024, followed by easing pressure from the US Fed.
However, silver’s recent spike to ₹1 lakh/kg arrived ahead of schedule has taken even me by surprise. From the data on trading terminals and exchanges, it’s clear that silver is setting up for a volatile journey ahead.
Silver: Volatile by nature
When compared to gold, silver carries at least 30% higher price volatility (βeta). Imagine trying to saddle a wild, untamed stallion—it bucks, kicks, and bolts unpredictably.
Many novice traders are tempted by a smooth rally, believing the way forward is easy once silver scales round numbers (like ₹50,000). But the heightened volatility of silver takes a toll, making corrections sharper and more frequent than in gold.
Behavioural finance and price resistance
It’s essential to grasp how behavioural finance affects market trends. When a security rallies, it faces three primary resistances:
Profit-taking and short selling: Investors often sell, thinking the price has “risen enough." If aggressive bulls do not absorb this selling pressure, the rally falters. At the same time, perma-bears initiate short selling, expecting prices to fall. Both tendencies are amplified at round number levels, such as ₹1 lakh. Human psychology plays out here, just as FMCG products priced at ₹999 appear cheaper than ₹1,000.
Limited buying power: Even the wealthiest traders have finite capital, meaning bullish momentum slows when buyers run out of funds.
Market gravity: In the absence of consistent buying and selling, prices tend to slide gradually. If bears attack aggressively, the decline accelerates, dragging prices down faster.
All trends eventually reverse once their underlying drivers disappear. For example, short sellers must eventually buy back their positions to lock in profits, becoming tomorrow’s bulls.
In a secular bull market, like the one silver is currently experiencing, bears may engage in short selling but typically close their positions with modest profits. As a result, declines tend to be shallow, brief, and less severe. According to Dow Theory, such mild corrections are a strong indicator of a healthy and robust bull market.
Emotional capital
Many traders mistakenly believe that financial capital is the only resource needed for success. That’s far from the truth. Intellectual capital (knowledge) and emotional capital (fear and greed—both often irrational) play equally crucial roles. Each exerts a distinct push-pull effect on prices, influencing market behaviour.
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If you dismiss the emotional commitment of traders as unquantifiable, you're missing a key driver of the market. I receive countless suprabhatam, or good morning, messages on social media—often filled with clichéd advice. Most of them belong in “file no. 13" (dustbin/recycle bin in management lingo). Yet, one message stands out: "Don’t tell me what you think—I prefer to gauge from your actions."
In today’s digital age, where disinformation is rampant, talk has become not just cheap but free. Savvy traders rely on market actions, not public opinions, to make informed decisions. Open interest and traded volume data provide far more clarity than the noise of fireside commentary from armchair experts.
In the current context, MCX data tells a revealing story: despite silver touching ₹1 lakh/kg on Tuesday, turnover and open interest barely moved. This indicates that the surge was driven by short covering and US price movements rather than fresh buying. In the US, the Forward Markets Commission (FMC) releases weekly Commitment of Traders (CoT) reports, which categorize open positions held by specialists, retail traders, and hedgers (such as producers and miners). The lack of significant increases in these numbers suggests that corrective dips may still be ahead.
Weak hands, strong hands
In financial markets, price discovery works much like a relay race. One trader makes a short-term, high-energy dash and hands the baton to the next. This handoff keeps the momentum alive, much like how markets transition from one phase to another.
In electronically traded markets, weak hands—short-term traders—exit the moment their profit targets are hit. Similarly, traders who bought at higher levels wait for rallies to breakeven and offload their positions, creating temporary overhead supply.
In both cases, stronger hands must step in to absorb the selling and drive prices higher. Ask yourself: If you were a strong hand, would you buy at elevated prices, or wait for a dip to accumulate positions? Get this dynamic right, and you’ll never fear a bull market correction again.
For more such analysis, read Profit Pulse.
A quick look at the chart shows that bulls are currently trapped with aggressive buy positions at various levels. Tuesday’s breakout only cleared the latest hurdle in this relay. As strong hands absorb the supply and push prices higher, previous long positions at $36/oz, $44/oz, and $50/oz will act as temporary resistance points or overhead supply zones.
This is just routine price discovery. Strong hands know this all too well—and so should you.
Staying the course
Your strategy? Tune out the short-term noise in the public domain. Adopt a foetal position and go into hibernation mode, like Rip Van Winkle. The long-term bull market in silver is just beginning to gather steam.
Acceleration will come when bears are forced to cover their shorts in sudden, sharp rallies. As mentioned earlier, silver’s intraday price volatility (βeta) is at least 30% higher than gold. This means silver moves in sporadic bursts, like the untamed stallion I described earlier—wild, unpredictable, and swift.
This dynamic creates what I call dual pressure.
Dual pressure occurs when perma bulls continue buying aggressively, forcing bears to cover their short positions. This powerful combination often leads to upper circuits—situations where only buyers remain on the counter, with no sellers in sight.
Also read | Is it goodbye gold, hello bitcoin?
So far, what we’ve seen are just routine rallies in silver. The real dual pressure rallies—more intense and sustained—are still on the horizon. Stay the course, and hold your positions with a long-term view. The wild ride is just getting started.
Note: This article draws on data from www.tradingview.com. Its purpose is to share interesting charts, data points, and thought-provoking insights, and should not be construed as investment advice. For investment decisions, please consult with a qualified financial advisor. This article is intended solely for educational purposes.
About the author: Vijay L Bhambwani is the author of India’s first official commodities trading guide. He specializes in designing statistical and behavioural trading models for his family-owned proprietary trading firm. A market veteran since 1986, he resides in South Mumbai and actively shares his market views. You can follow him on Twitter @vijaybhambwani and explore his video blog at www.youtube.com/vijaybhambwani.
Disclosure: The author and his proprietary trading firm hold investments in silver ETFs in compliance with fair disclosure norms and Sebi guidelines.
