How Low Can Silver Go?

May 4, 2011

Silver has posted an incredible first four months of the year, appreciating by over 60%! But we all know the adage that nothing goes up forever and silver proved it true by finally hitting a wall and correcting by 15% in just three days. The metal continued declining this morning and just tested the psychologically important $40 level.

This correction has been blamed on the COMEX margin increases, reclassification of delivery-eligible silver, bank manipulation, Bin Laden’s death and a whole host of other factors. These certainly seemed to play some part, but I think the simpler explanation is good old-fashioned profit taking. Silver finally matched its all-time high and was nearing $50 after a parabolic-like move, so plenty of investors that bought in around $20 or less likely decided it was a good time to take some profits off the table.

The big question now becomes “How Low Can Silver Go?” The fundamental situation… supply shortages, surging investment demand and central bank buying, sustained record low interest rates, out-of-control spending, record deficits, debts and the U.S. dollar falling off a cliff, all seem to suggest that the correction will be short-lived. None of these situations have materially improved in the past week and I don’t see any of them miraculously turning the corner anytime soon. The FED might slowly raise rates later this year, but they would have to rise to above the true inflation rate to have any serious impact on gold and silver. Neither political party seems serious about addressing the budget crisis or reducing our bloated military budget. They continue to bicker about cutting a few million here or there from NPR or Planned Parenthood for ideological reasons. Whether they cut $30 Billion or $38 Billion, it is still just a fraction of our annual budget deficit of $1.5 Trillion.

Despite the strong fundamentals, the technical chart shows plenty of room for more downside. Furthermore, the last bounce was not nearly as robust or convincing as previous ones. Silver fell through its 20-day moving average on Tuesday and the drop below $40 will test just how many weak hands are holding silver this time around. If enough buyers emerge, $40 could hold, but any panic selling is likely to force the price down to support at the 50-day moving average of $38.67. I find it likely that this support will hold, but further down we see support at the $36 level, which was a zone of previous resistance and consolidation. Below that is the 100-day moving average of $34, which has not been breached since the Summer of 2010. I believe the likelihood of silver falling below this level and testing its 200-day moving average of $28 is less than 5%.

It is worth pointing out that both the RSI and MACD have yet to reach oversold territory, despite the 15% dip. They are likely to begin flashing oversold on a dip below the 50-day moving average of $38.67, which I believe is the lowest silver will go during this correction.

Remember that as difficult as it can be to stomach in the short term, these corrections are normal and healthy parts of any bull market. The medium and long-term picture is still intact and I remain convinced that we will see $1800 gold and $60+ silver by year end. We are nowhere near a top or end of this bull market as some analysts and reporters are shouting.

The inflation-adjusted highs are still a significant distance away and the fundamental conditions that created the spike in 1980 are much worse today. Depending on which inflation statistics you want to use, gold still needs to climb to somewhere between $2,400 and $5,000 and silver needs to hit a minimum of $140 and could climb as high as $500 by some estimates. This short term correction will once again prove to be the same thing every other correction has been in the past ten years — a buying opportunity.

Mining stocks have been significantly under-performing the metals thus far in 2011. However, I believe they will play catch up during the back half of the year. If you would like to see which stocks I am holding in the Gold Stock Bull portfolio, get the monthly newsletter and receive email alerts whenever I am buying the dip or taking profits off the table, sign up for the Premium Membership at just $35/month.

Jason Hamlin
Founder - GoldStockBull
www.goldstockbull.com
Jason@GoldStockBull.com

Jason Hamlin is the founder of Gold Stock Bull and publishes a highly-rated investment newsletter focused on strategies for profiting in the bull markets in gold, silver, energy, agriculture and emerging technologies. Mr. Hamlin has a background analyzing charts and trends for the world’s largest market research company, is versed in fundamental and technical analysis and has consulted to Fortune 500 companies around the globe. Jason is a cycles investor, student of Austrian economics and speaks regularly at investment conferences throughout North America. The Gold Stock Bull newsletter is focused on finding junior mining companies that are undervalued relative to their peers.  His website is at www.goldstockbull.com .

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce