Sunday, April 24, 2011

What happens when we get to $50 Silver?

Below is the Easter precious metals market schedule according to Zero Hedge:

•    April 21st, Holy Thursday: day before a holiday
•    April 22nd: Good Friday: CME Closed
•    April 23rd,Easter Saturday: Markets Closed
•    April 24th,Easter Sunday: Markets Closed
•    April 25th, Easter Monday: LME Closed
•    April 26th, Tuesday: May Options Expiration CME

We saw some very interesting trading on Friday with Silver rocketing up around a dollar on very light volume to above $47.

With the price of Silver so close to the all time high ($50, January 1980) it would be crazy not to expect this will be tested in the short term.

So what happens at $50?

Firstly let's consider that we have options expiry on Tuesday, this is often a time of short term price weakness. If we see price weakness in the week ahead then the attempt at taking out a new all time high might not come for a week or two.

There's a lot of momentum in the move towards $50, I think it would be a mistake to dismiss the possibility that we will surpass it and see new highs in the first half of this year.


I do think that $50 will prove to be a short term psychological barrier, but my thinking is that there will probably be a lot of stops (by those shorting) just above the $50 level. So if Silver's momentum takes it above and these are triggered then we might just see the mother of all covering rallies/short squeezes with the metal heading to $55-$60 (maybe even higher) before this rally is over.

For interests sake, here is how Gold took out it's 1980 high in early 2008. It met short term resistance on the first test, had a moderate correction, but in the process formed a wedge which formed the platform for the breakout:


Of course those familiar with Gold's trajectory over the last few years would know that after peaking at around $1030 it ended up falling back below $850 briefly in late 2008.

If we get the short squeeze in Silver as it heads above $50 this might be a good place to lighten the load. Historically Silver has seen large corrections following each of these spikes in price and there is no guarantee Silver stays above $50 once it's surpassed.

Following each of the previous spikes in Silver (2004/2006/2008) we saw a large correction ranging from around 25% to 40%.

If Silver heads to $60 at the peak of the current spike, the correction that follows could take it back below $50 to $45 in the event of a 25% correction or to $36 in the event of a 40% correction...

On a technical basis Silver is well overbought and it would be prudent to exercise caution when buying at these levels even if it can go higher short term.


BB.

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

2 comments:

  1. Hi BB

    When you say "metal heading to $55-$60 (maybe even higher) before this rally is over". Where do you anticipate the price of silver to be in say 3 months and 12 months time?

    ReplyDelete
  2. Hi Anon

    Hard to say with any certainty, really I can only make educated guesses (like anyone else). If we see $60 in May/June and then a correction back to $35, then it may trade in a range around $35-$50 for sometime.

    Cheers
    BB.

    ReplyDelete