Sarah Benali  

Monday April 10, 2017 14:35

(Kitco News) - Gold and silver prices have come off recent highs as the market takes profits off the table, but one veteran trader says the metals are at an inflection point, especially if you look at silver.

When it comes to the white metal, Vince Lanci, owner of NY-based Echobay Partners, told Kitco News the metal is out of its “comfort zone” and ready to make a larger move than seen Monday.

“The direction is still unknown if past is any indication. There is a $2.00 move in the works here. We are long volatility and feel this is the pullback before a spike to $21, or the flat out top,” Lanci said in an interview.

May Comex silver futures settled at $17.915 an ounce, down more than 1% on the day.

He went on to add more caution, “Based on our industry contacts and a large sale of June $21.00 calls in February before the $18 level wash out soon after, we do not think silver will breach $21.00.”

He added that banks know about these orders and are tempted to sell ahead of producer hedges. “This is a recipe for a violent rejection lower, as we are seeing today. But it is not the first time.”

According to Lanci’s research, silver has a tendency of rejecting the $18 area “quite violently,” although he added that “rejection” does not always mean lower prices.

“If too many shorts front-run the producer sales, and an event like Brexit occurs as in July 2016, the rally can be a disaster for shorts. When silver pushed back to $18 in July 2016, those producer hedges were gobbled up by fresh money and the shorts were bagged and tagged,” he explained. “There was little to stop silver from rallying as high as it did. That was a bonafide short squeeze by players who got cut front running producer hedges.”
As Lanci put it, silver’s most recent pullback could be signaling a healthy bull rally although in this volatile market, anything can happen.

“We view this pullback from $18 as beginning a healthy bull flag unless either of the following happens: First, the market must hold $17.50 on a settlement basis. Second, bull flags last 3 to 5 days before resuming the rally. Anything over 5 days would give us pause,” he explained.

From a technical standpoint, silver has a triple top in the $18.50 area, Lanci noted. “Historically, triple tops are made to be broken. So, while we may not be buying this dip, we sure will not be selling silver if it gets in the $18.50 area for a fourth time.”

Lanci’s strategy is simple: buy above $18.50 for a three-day pop to $21 area then exit.

“We think that in all probability, if silver breaks the $18.50 area on a settlement basis, producers will let it breathe until the next hedging level at $21.00,” he said. “Those call sales have served us well as an indicator so far.”

Another good play highlighted by the longtime trader is to lighten long positions.

“If the market breaches $18.50, let it run and sell the rest between $19 and $21.00,” he said. “But put in a sell stop below $18.50 in case the whole thing pivots and all that fresh buying in the $18.50 area puts stops in place.”

When it comes to gold and silver, Lanci said the latter will probably play catch-up again.

“Gold is dragging silver reluctantly higher and historically this does not end well for silver,” he noted. However, he added that gold’s strength could “soon pass the baton of leadership” to silver in the next leg up.

“If gold manages to rally again as a safe haven, silver will follow suit but it would really need to breach the $18.54 level before it starts to outperform gold. Remember, silver actually outperformed gold during Brexit but that was after it broke $18.50.”