SILVER UPDATE
Roland Watson
First let me say the email response to my
previous article “The Death of Gold?” was unanimous – everyone disagreed with
me. Whether that is a contrarian sell signal I do not know. I hope to follow up
that article but since I mainly write about silver, allow me a few comments on
the silver situation. The chart below sums it up I think – we are at a critical
juncture for silver. Indeed the situation is so precarious; a resolution either
way may already be underway by the time you read this article.
After dropping almost five dollars, silver
has reached its 7 month trend line. What will happen now is important to the
general silver situation for at least several months. If this line is
decisively broken, I see no barrier to stopping silver heading down to its 200
day moving average and then some. If it rallies from here we could see another
challenge at the old high of $21 set in March.
Now traders will repeat the maxim “The
trend is your friend” and that certainly holds true until the trend is no
longer your friend and breaks down into a lower longer term trendline. Note
that this trendline has been in force since August 2007. But if we compare
troughs to peaks, August 17th to March 17th is exactly 7
months. That compares to the 2004 run up which also lasted 7 months from its
low to peak and we get 8 months for the 2006 run up. Going by precedence, this
trend is long in the tooth.
As subscribers may recall, I exited my
speculative positions in silver (mainly stocks) some weeks ago because one of
our exit conditions was breached – a decisive break below the 50-day moving
average. This also happened in 2004 and 2006 and those bulls did not recover
for over a year.
So when silver rallied back up to its 50-day
moving average, I sold. Readers are invited to check out my daily message board
comments at this link
for this weekend only. The password is “libertydollar”.
A further confirmation of silver weakness
was its failure to exceed the 50% retracement level between the top of $21.34
and the then bottom of $16.30 which works out at $18.80. When silver dropped
hugely near the end of the 2006 run up, not only did it contain itself above
the 50-day moving average but immediately shot up to a new but brief high. We
see no such action on this correction.
Nevertheless, there is always the
possibility of a final push in silver prices to new highs. I do not discount
that since in this game you have to weigh one probability against another and
not sell all your holdings in one go since the market is not subject to our
dogmatic dictats.
For example, Elliott Wave suggests a final
wave 5 up for silver and hence analysts suggest this is only the preceding wave
4 correction. That may well be but the problem is that is a pretty big wave 4
correction in price and time. However, the wave 2 top of November 17th
at $16.20 has not been breached (barely) so theoretically another final move up
cannot be discounted (though one suspects that heavy selling will be
encountered at or near the high of $21).
But another important indicator for silver
is gold. Since silver is essentially a derivative of gold when it comes to
investment and speculation, where gold leads, silver follows but not vice
versa. Silver cannot blast to new highs unless gold is doing the same. The
chart below for gold suggests trouble for silver. The corresponding trend line
for gold was actually breached on April 1st at $920 and though gold
has retested this line several times since then, it has failed to reclaim it.
The reasoning is thus, if gold cannot reclaim its line, why should silver? The only hope one can see at this point is gold forming a
double bottom at around $875 to form a platform for a new rally.
Clearly, traders will be taking their
positions to the long or short side at this critical price line for silver. A
significant price rise to either side will trigger a cascade of stop losses
thus precipitating a price move in that direction. I don’t know what that price
point will be because different traders have different stop points.
But to put things in perspective, I will be
waiting to jump back on board the silver train at some point because this bull
market in a wider sense is not over. People think that we are somewhere akin to
1978 or 1979 in this bull market. I think they are too pessimistic. I think it
is more like the mid 1960s when silver began its inexorable rise from $1.29 to
peak first in 1967 before resting and taking off again. That means another 15 years or more rising silver prices, but don’t
forget the big corrections on the way!
April 25, 2008
Further analysis of silver can
be had by going to our silver blog at http://silveranalyst.blogspot.com
where readers can obtain a free issue of The Silver Analyst and learn about
subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk.
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