Silver equities
enter buying zone
Troy Schwensen CPA
The month
of March 08 has seen the gold price rally to all time highs of around US$1,030
an ounce only to come crashing back down to earth in recent weeks to begin a
largely anticipated consolidation. The mainstream investment markets continue
to make light of the disturbing economic news that is being released on a daily
basis. Despite Ben Bernanke now entertaining the idea of a US recession, the markets continue
to steadfastly hold key support levels. It is simply a question of when and not
if these support levels will eventually break. This ship is simply taking on
far too much water for the pumps to manage, but at this stage it is staying
afloat.
Gold Chart ($US)
XAU
XAU Gold Ratio
The XAU, for the month of March 08, hit our
short term target of 210 before falling 12% to 184.68, on a gold price retreat
of 11.3% from its peak of just over US$1,030 an ounce. March 08 has seen the
XAU/Gold ratio fall as low as 0.19 before recovering to just over 0.20 in
recent days, as the shares start to outperform the metal once more. This is
bullish in its implications. The XAU has bounced nicely off strong support at
around 170 and has performed admirably in the face of weaker metal prices.
Outlook
The two short term scenarios as I see it over the coming weeks
and months:
Scenario 1:The XAU will continue to be
range bound with support at 170 and resistance at 190 and 210. Regardless of
whether equities rise or fall, I would still expect the precious metals sector
to outperform the mainstream markets. I support this scenario.
Scenario
2: The general equity markets get caught up in a violent downturn,
taking the precious metals sector temporarily
with it. This could result in the XAU falling down to solid support levels at
the 145 - 150 mark. Equity markets remain extremely vulnerable and the risk of
this scenario occurring firmly remains. For now, I do not support this
scenario.
Intermediate
Term Outlook:
Our next intermediate term target is 270 towards the second half
of 2008 or early 2009, on a successful break of strong resistance at 210 - 215.
NORTH AMERICAN SILVER INDEX (NASI)
The NASI, for the month of March 08, failed to break strong
resistance at 9,500 - 10,000, despite the silver price achieving new highs. The
index has since held up remarkably well and closed at 8,378, as the silver
price has retreated sharply to its present level at $17.81. The relative
strength comparative with the silver price (middle section of the above chart)
entered the Accumulate region for the first time since April/May 2006,
indicating silver equities again represent excellent value relative to metal
prices. A look back to the beginning of 2003 shows this level has been hit on
three prior occasions (green vertical lines), with each resulting in a fairly
strong performance in the silver equities over the ensuing 6-12 months at an
average return of 130% (classic buy on the dip indicator).
The chart below shows the silver price encountering stiff
resistance at close to US$21 an ounce. The relative strength comparative with
gold (middle section of the chart below) also experienced overwhelming
resistance at the 0.021 level, signaling the silver price was going to
struggle. Silver is presently sitting in no man’s land and has downside risk
all the way to US$15.50 - $16.00. Here, it should find strong support in the
form of the 150 day moving average and a solid trend line.
Silver Chart ($US)
Outlook
The two potential short term scenarios as I see it over the
coming weeks:
Scenario
1: The NASI will continue to be range bound from 7,500 - 10,000.
The silver price will rally in the short term. This may see the NASI tackle
strong resistance again, before retreating as the silver price pulls back
towards strong support at US$15.50 - $16.00. I lean towards this scenario.
Scenario
2: If there is a sharp fall in the equity markets, we could see a
worse case scenario of a pull back in the NASI down to the longer term support
level of 5,000 and the silver price down to $13.50 - $14.50. While a distinct
possibility given the present market uncertainty, I don’t presently support
this scenario.
Intermediate
Term Outlook:
The next intermediate term target for the NASI is still 10,500 -
11,000, followed by a longer term target of 13,000 - 15,000 towards the second
half of 2008 or early 2009. The next intermediate term target for the silver
price is $24.50 to $26.50, again towards the second half of 2008 or early 2009.
Closing Comments
Given the disappointing performance of many precious metals
equities, investor resolve continues to be tested. When I started investing in
this market back in 2002, I often read articles about bull markets and how they
are renowned for throwing off a large majority of investors along the way. At
the time, I didn’t really appreciate what these authors meant. 6 years later it
is safe to say I am getting a better appreciation! The only reason I remain
firmly in the saddle is because I have made the effort to understand as much as
I can about why I am 100% invested in this sector. Once you have done these
hard yards, you remain mentally immune to what the market has to throw at you.
I sincerely applaud and encourage you all to keep reading and keep learning. For
anyone interested I write a free newsletter on the precious metals market which
you can sign up for at The Global Speculator website below. Past issues of the
newsletter may also be accessed.
April 10, 2008
Troy
Schwensen
Research Analyst Editor
GoldNerds The Global Speculator
Disclaimer
This publication has been prepared from a wide variety of
sources which the editor to the best of his knowledge and belief considers
accurate. The editor does not Warren
the accuracy of the information and forecasts contained in this publication. This
information is provided for educational purposes and nothing written should be
construed as a solicitation to buy and sell securities.
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