What a stampede out of silver we have seen since it nearly broke the $50.00 an oz. mark on two occasions, 24th of April then again on the 28th. Talk about a double top being a bearish indicator!
For once we have to agree with the statistical gurus, this is a signal that should not, and was not, ignored, at least not in the short term as by the sixth of May, only nine days later the price had dropped to an intra day low of just $33.27 before ending the week with a slight recovery at $35.50.
That movement back off the bottom was probably short speculators covering their positions before the weekend so could reasonably be discounted as of no significance in the overall trend of the metal.
- So does all this selling activity mean that we should join the flight out of silver a.s.a.p.?
- Is the downward plunge set to continue?
- Why has it occurred when no trend changing fundamental has happened to alter our perception of the underlying upward momentum of the price of silver?
Selling our silver – no way Jose !
The Reasons Why We Are Hanging In There
Our most important reason is that we are basically long term investors despite being tempted from time to time with a few option skirmishes around the fringes to spice up our trading. Three weeks ago we traded a third of our holdings out of iShares Silver Trust (SLV) at $43.50 and into SPDR Gold Trust (GLD) based on our interpretation of the gold/silver ratio .
It was our intention to repeat the trade should the ratio move sufficiently further down, which it did not. We had a gut feeling that the rapid rise in silver was overdone and that a correction was due but that gold would, after a pause, continue its steady upward path. In the event silvers’ twin peaks and subsequent fall caught us off guard although a little by – play with options helped to lessen our sense of lost opportunities, aka dollars.
Followers of our ramblings may recall that we have in recent months expressed our wish for corrections to give us opportunities to top up our holdings. Our tactical approach was to split our available resources into three equal amounts and enter the market when silver hit $40, $35, and finally at $30 an ounce. Two of those targets have been hit, if the third arrives and the price drops further then we will admit our mistake, unload the lot and still walk away with an acceptable profit. We started buying at $17 an oz!
Follow the Trend
In the meantime we take solace from the fact that there has been no change in the fundamentals to reverse the bullish trend that silver, together with gold, has enjoyed. Gold has fallen, but to a much lesser extent as it is a much less volatile market than silver and has shown signs of strong underlying support during the last two weeks and, importantly, the two metals tend to follow the same path.
This supports possibly our most important investing principal “the trend is our friend”. Nothing yet has occurred to shake our faith that the long term trend in silver will remain bullish.
Causes For Concern
It would be foolhardy not to consider the effect on silver of the events of the past two weeks. Which particular factor or combination of factors caused the silver price to plunge is wide open to conjecture.
These are our thoughts
- The dollar reversed its poor showing with signs that it is strengthening. A dubious proposition bearing in mind the potentially disastrous flaws in so many of the fiat currencies with which it is compared.
- Margin requirements in the silver futures market were tightened again, this may have led to long positions being closed to preserve liquidity, exacerbated by an awareness that, as the silver market is so highly volatile due to its small size, the temptation for many short term speculators to take profits after such a sharp rise would, as it did, cause a waterfall in price.
- Adverse publicity in the media with bubble mania grabbing the headlines. The premise that bad news sells newspapers, or grabs attention to any other media source, should be taken into account.
- Bin Laden?
- Price of oil. OPEC will not increase output if the price falls, the glut in the US inventories will not last, world wide supply problems will persist until, or more likely if, the middle east oil producers are ever sorted so expect the price to go back up pretty smartish.
- Inflation remains on the increase, particularly for the basics for survival, food and energy. Soft commodity prices have also fallen in sympathy with copper and other hard commodities but are likely to surge back upwards as they are the basic necessities for human survival and China, India and other emerging nations are increasingly demanding their fair share.
- QE2 coming to an end in June presents a questionable scenario. Can the Fed make a real impact on reducing the money supply without risking a headlong dive into a deep depression? Actually we do not think this is likely, the big question here is whether the Fed continues to play lip service to the figment of maintaining the value of the dollar and whether or not a further round of priming the economy under the name of QE3 will take place after an acceptable interval.
Silver & Gold to Get Back On Track
OK, so there are many more reasons to consider, you will all have your own ideas on which will reflect upon your investment decisions and their various effects. We will hold to our belief that this current downside is transitory, that normal service in silver and gold will be resumed, and that there is a whole world out there hungry for these precious metals to defend themselves from the ever weakening dollar and other suspect fiat currencies.
Meanwhile any significant cry for liquidity in the face of falling stock markets will be confined to the US and will only impact in the very short term on gold and silver prices and demand.
We cannot pretend that we have any idea where the silver bottom is in this current reversal, nor can we deny that we are in two minds about our $30 target for topping up our holding.
It is quite possible that the floor may be well under that price. It could be that one of our preconceptions about the underlying reason for our confidence in the metal is that demand is outstripping supply is totally wrong and that somewhere there is a huge hoard of the metal waiting to hit the market.
Who knows what fundamental issues may emerge or what hyped up news stories may shatter our confidence in the long term continuation of the silver bull run to our price target of $75 an oz. by the years’ end ? Until we some substantial evidence to the contrary we will continue to hold on to our silver however optimistically.