27 April 2011
What's up with silver? The question is what isn't up with it, the white metal having risen a Viagra-inspired 150 percent in less than a year. With silver roaring to within a whisker of its all-time high over the Easter weekend, the warning wolves have come out in packs. Yet for all the cries of "bubble" from the top-callers (who've been wrong since $25), silver well could run further before this current move's exhausted.
What the bubble brigade fails to realize is that silver is undergoing a normal parabolic response to years of a distorted supply-demand picture. This isn't a bubble, it's a coming-out party, silver announcing it's arrived. Enjoy the hors d'ouevres, as the party is only getting started. And while you're at it, throw out your "normal" chart analysis, from here to the top it's pure fundamentals. Has silver historically corrected once it's reached "X" level on some indicator? Never mind, just don't get in the way of the train.
What's going on with silver right now - something I'm surprised nobody seems to be talking about - is simply that it's having its own "golden moment." That is to say, silver is poised to beat its own all-time nominal high, just as gold did back in '08 when that metal was the one making the big upside move. In other words, Silver 2011 = Gold 2008. Let's now examine the implications this has for prices going forward.
As a student of fractals, I look for repeat patterns in markets, and this one's a real standout. As the above chart shows, once gold equaled its high of $850 (set in 1980) it didn't stop there - it went on to scrape the $1,000 level, an overshot of roughly 17 percent. Should the pattern maintain, this gives us an upside silver target between $56-$59 based on the all-time intraday $50 high.
From there, if the golden precedent holds, we'll at last have that correction they've been crowing about - a brutal 20 or 30 percent meltdown that will deliver to the newly-minted silver bulls what Mr. Jim Sinclair calls a "religious experience." Out will jump the bubble brigade, and once again financial TV will buzz with "I-told-you-so" top-callers and tulip-mania-talking trolls.
Then, the gold chart hints, silver will do what all bull markets do: frustrate both longs and shorts. As you can see, gold fairly flat lined once it made its initial post-$1000 drop, drifting until it finally bottomed near the end of '08. Those of you expecting another big buying-opportunity dip before the summer may end up disappointed - same goes for any bears looking for a further beat down. Rather than rising to new all-time highs, silver could switch to a rather dull range-trade mode, slowly leaking downward, wringing out all the excess optimism in preparation for the next launch. Unfortunately for the impatient, that's a process that's usually measured in months, not days.
A key to watch: the USDX, which is what this whole metals bull has really been about all along. A drop to as far as 70.75, and the whole picture changes, as the U.S. monetary authorities must finally intervene on behalf of their bonds and currency. That won't be precious-metals positive.
Disclaimer: the preceding is for academic purposes only, and should not be treated as trading advice. Trading and investing involves risk.
JOHN SOLTEZ is a trader and the author of the novel Only in America, the story of a young professional struggling to cope with life during a time of economic and social turbulence. You can check out this critically-praised book at www.amazon.com/dp/061533007X Reach John with comments at: jsoltez@gmail.com .
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