Sunday, January 23, 2011

Silver Price Correction - Update on Potential Targets

I last spoke about some Silver correction targets shortly after the spike to $29.33 (November 9th), however Silver then proceeded to rally higher peaking at $31.24 around 7 weeks later (January 3rd). It appeared to have broken a resistance line that was 7 years in the making as discussed in this post, however has once again started to correct in price. Silver is certainly a volatile metal and the short term price movements are hard to predict.

After the parabolic spikes in 2004, 2006 and 2008 we saw sharp corrections following:

2004
$8.62 - April 2nd, 2004 (peak)
$5.43 - May 10th, 2004 (trough)
37% drop

2006
$16.68 - April 18th, 2006 (peak)
$9.40 - June 14th, 2006 (trough)
44% drop

2008
$21.35 - March 17th, 2008 (peak)
$15.96 - May 1st, 2008 (trough)
25% drop

It's interesting that each of the corrections were similar in size from a timing perspective (all corrections played out within 6-8 weeks and all around 2 years apart).

Given the new high of $31.24, here are some price correction targets based on the size of the earlier corrections:
25% drop - $23.43
37% drop - $19.68
44% drop - $17.49

That's not to say I think that's where the price is going, however we should keep in mind just how quickly Silver has risen in price the last few months.

I think a correction of 44% is extremely unlikely. $19.50 was very heavy resistance prior to Silver breaking through late in 2010 so IF Silver were to fall below $25 then I think between $19.50 and $21.50 (near 2008 peak) would provide a huge amount of support.

That said, my personal opinion as I've mentioned before is that Silver/Gold are heading into the third stage of their bull market, I think from here the corrections will generally be shallower than those we saw earlier in the bull market. We may have already seen the bottom on Friday...

The commercial traders have continued to reduce their short exposure to both Gold and Silver the last few weeks. Generally this points to a bullish outlook for the price (as commercials reduce their short exposure). You can view the reports here.

I imagine with the rise in Silver price there have been many  new speculators and investors jump on board, probably some of them right at the peak.  With well established commentators calling for a Silver price of $500 or even $6000, who can blame them? Looks like easy money right? Some will panic and sell their positions, however those that have researched the precious metals will know that while there are sharp corrections along the way, those that have held their positions through these sharp corrections have still been rewarded in the longer run.

Whether Silver bottoms at $19.50, $22, $25 or it has already bottomed, there are still gains to be had over the longer term (as the bull market continues it's course) in my opinion. If you can't handle seeing violent swings in price then perhaps Silver investment is not for you.

BB.

Disclosure: Positions held in Silver. Not investment advice. Do your own research.

3 comments:

  1. Are these figures in AUD or USD? The problem with analysis in USD is it means little/less if you're earning AUD.

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  2. I doesn't make any differences what currency, just look at the percentages.

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  3. Anon, they are USD figures. The AUD price of Silver is a results of the USD price multiplied by the exchange rate, so in my opinion is less important to be monitoring as far as patterns and bull market progression goes. Further to this the sentiment of ASX listed stocks seems to follow that of the US rather than tracking the local price of the metals.

    Cheers
    BB.

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