Silver Bulls Routed. No Way!

May 2, 2011 | By | Reply More

With what seems like great glee, a number of the worlds’ financial media reported the 11% drop in the price of silver when the Asian markets opened for business this Monday morning. Among them were Bloomberg, The Los Angeles Times, Wall St. Journal, Reuters, and The Economic Times of India.

Slides, plunges, bubbles, bulls routed and other synonyms featured in their articles as if wanting to give the impression that the trend in silver had reversed and that it would be prudent to cut and run.

What was not mentioned, perhaps as they had already gone to print, was that from a low of $43.00 an oz., the price picked up to over $45.00 in less than two hours and at the time of writing this post has steadied at around $45.50.

We suggest that this tells us that, in the Far East and any European markets open today (May Day Holiday) there is strong underlying support.

Adverse comment will be picked up by speculators and long term investors alike. Since last week when the silver price attacked the 1980 all time high, such comment has increased. This means to us that we have to acknowledge that many flaky dabblers in silver may bail out taking their profits with them. Lest any reader thinks otherwise we neither blame them nor think they are mistaken.

As many an investment sage has been quoted “it is never wrong to take a profit”.

Clearly there are uncertain times ahead for silver. Talk of the metal reaching and overtaking the $50.00 all time high may be, in the short term, optimistic. That high took place 31 years ago in very different circumstances. The Hunt brothers were attempting to dominate and manipulate what was then , and still is, a very small market.

Then, the world economic situation bore little or no relation to that of today, the dollar was in its heyday of supremacy as the unchallenged world reserve currency. The internet did not exist so the information that is now instantly accessible to the average investor worldwide (aka: man in the street) was confined to the very few ‘in the know’ professional players who could run the market up or down.

Today we have the central banks of all the major countries, not a few of whom are unfriendly to the US, together with the highly capitalized hedge funds and other large worldwide financial institutions and  not forgetting the millions of interested investors and speculators all deliberating their involvement in this tiny silver market as the once mighty buck slithers into the abyss of worthlessness.

Prior to today’s NY open we have also seen gold come off its highs after a promising Asian opening but the stentorian cries of gold being in a bubble are somewhat muted, at least to that of silvers’ much anticipated demise.

The plain fact is that the recent accelerated rise in both metals has been solely due to one fact, and only one fact. That is the increased decline in confidence in the US dollar as a result of Bernanke’s utterances last week.

After such a rise it is hardly surprising that profit taking overseas has taken the froth off both metals. What will be most interesting to those of us precious metal watchers will be the reaction to the press comments and other developments when US trading gets underway this morning. Beware the false signals often given out by the first half hour’s activity.

We anticipate that the initial reaction will be a sharp drop in silver, and to a lesser degree in gold. We hope that this will extend into the later trading hours as we are looking to increase our holding of silver as we have little doubt that a significant pullback must occur sooner or later, so why not today?

Shake out the non committed and get back to reality. The only ‘ fly in the ointment’ that we can foresee is if the Fed does an unexpected U-turn when the present round of quantitative easing (QE2) ceases in June.

Our money is on a pause, maybe until after the holiday season is over, before further stimulus is injected into the economy. We cannot imagine that any effective effort will be made to deplete the money supply while jobs and housing remain in the doldrums and an election has to be prepared for.

That means that all the criteria that have so far pushed up the price of silver, together with its stable mate gold, remain in place and are arguably going to become yet more serious.

A recent poll indicates that many Americans believe that the recession is still with us and did not go away in 2009 as we were led to believe by our political masters. We agree and maybe the worst is yet to come.

Certainly the rise and rise of the stock market is not, in these circumstances, indicative of a healthy economy as it might have been judged in the past. Where else are all those constantly minted new paper dollars going to find a productive home? Certainly not property which is still in a bust. Bonds and treasuries are looking increasingly fragile as their yields rise and value diminishes.

That leaves commodities of all sorts and the stock market. Just imagine how much money would pour into commodities, particularly gold and silver, nor forgetting oil and platinum group metals (PGMs), if swathes of financial institutions, hedge funds and Joe Public lose faith in the stock market, bail out seeking a new home to protect their capital.

We will remain sanguine about the immediate future of silver, keep our fingers crossed that we can catch a significant dip, which we guess, or is it hope, will be around $35-$40 an oz. to increase our holding.

We have already switched a third of holding from silver into gold based on our interpretation of the gold/silver ratio. If the pullback in silver stalls above $40 an ounce our next move will likely be into gold but the expense of investing in the metal is off putting whether in the physical version, via Bullion or SPDR Gold Trust (GLD). This is where long term options (leaps) come into play.

Although trading options are strictly speculative,up to two years to expiry could almost be considered a medium term investment play with some built in cost effective leverage.

We certainly expect to see silver break out above $50 an oz. Maybe soon, maybe after a few weeks. When it will would only be a guess. We also think that by the end of the year the price of silver will far exceed $50 an oz. The question we will wrestle with is whether gold will begin and continue to outperform silver over this time frame?

Interestingly silver has stayed above the $45.00 level in the first quarter of an hour of the NY open. Not quite what we expected.

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