Sunday, July 1, 2012

An ounce of Gold for your thoughts on Silver

I just had a look back over my recent posts on the blog and noticed that the last 5 have been on property, you could be forgiven for forgetting the name of this blog is "Bullion" Baron and not "Property" Baron!

So back to regular scheduling.

Those keeping score over the last couple of months will be aware that I've had a few good calls recently. The day after the capitulation and $1526 Gold print in mid May I suggested the bottom was in for the metals. Although Silver has now put in a slightly lower low, Gold has managed to hold well above. I wrote this second post following up with some further thoughts a couple of days later talking about the negative main stream media stories that were circulating about Gold, further hardening my contrarian stance that Gold was ready to trade higher.

In a follow up post on June 3rd I suggested that the USDX had just put in a major top (reached around 83.5) and it has traded below this peak since. Quite a few traders have been talking about the USDX heading back to the same level seen in early 2009 and again in 2010 (around 88-89), but I just can't see it happening with such extremely bullish sentiment levels unless there is a major catalyst (e.g. further breakdown in the Eurozone, which is looking even less likely with results of the Thursday/Friday summit). I expect the top is in for the USDX and it's decline will assist the ability of Gold, Silver and other risk assets to trade higher.

In the same post above on June 3rd I also correctly guessed that:
Greece will vote for the pro-bailout/austerity parties and will remain in the Eurozone (for the time being!).

The Fed will continue Operation Twist, but won't yet engage in new asset purchasing.
So what next?

I think the results from the Euro summit have the potential to drive a fairly significant rally in risk assets/commodities (which Silver and Gold have been trading as for a while now). If for no other reason than they are particularly depressed and looking for a catalyst to push them out of these oversold levels (e.g. on my Twitter account last week I posted a chart for Oil sentiment showing it's oversold level).

While I don't think bailing out banks (debt to replace or raised in addition to existing debt) is a long term solution to the problem, I think the market will see it as Merkel caving to the demands of Italy and Spain. Cracks are showing in her tough exterior and this Summit proved that when push comes to shove she is prepared to budge.

How is Silver looking at present? 

Sentiment in Silver was depressed to extremely low levels in the past week as the price fell back to test support at $26 (Sentiment chart from 'The Short Side of Long'):

On the weekly chart the RSI was showing Silver trading at oversold levels not yet seen in this bull market (including during the 2008 crash), chart from 'Smart Money Tracker Premium':

This weekly chart shows the level of support the $26 mark has provided for Silver over the past 18 months:

It also shows what could be a descending triangle. If the price of Silver broke and closed below the $26 level it could force a particularly nasty drop to the next major support levels around the $18-20 mark. While I don't expect this given how oversold Silver is, it would pay to be mentally prepared for such a drawn down when purchasing at current prices.

The daily chart shows Silver bouncing sharply off the $26 lows:

To break above the short term downtrend a close above $28 would help and above $32 to clear the downtrend from the April 2011 peak. Of course even a close above these resistance levels is not a guarantee that it will hold... in late February the price broke above the downtrend line but wasn't able to hold.

On the monthly chart there is a flag setup, although it would allow for further downside to low $20s:

The current sentiment on forums and sites that I frequent is bearish with quite a few leaning toward an expectation there is further downside to come (some with reasonable arguments made). Some self proclaimed gurus are all out of their Silver position with the expectations that it drops to low $20s or even further (with little to no reasoning provided, e.g. scaremongering). 

What do I think Silver is likely to do over the rest of the year?

While I don't claim to be a guru or to be able to predict the future with 100% accuracy, I think there are strong signals pointing to a bottom being in for Silver.

I was a heavier buyer of physical Silver at the lows seen in late 2008. I am a buyer at current levels and I think $26-28 Silver will be seen as a catch when the price is much higher in the months and years ahead. 

Those who bought Silver in late 2008 at US$11 instead of catching the exact bottom at US$9 are probably not all that concerned that they didn't catch the exact bottom, they are happy they got in before the price multiplied over the years following. 

Within 4 months of the $9 low in October 2008, the price of Silver had rallied over 60% to almost $15. A price move like that today would take us back into the $40s and I wouldn't be surprised to see such a move over the coming months if the European situation has been stabilised.

Time will tell whether I am right, but I am a buyer at current prices and will be a buyer if the price falls further given the bubble prices that are likely to develop with further insane policy decisions from the central bankers.

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  1. I share the same sentiments. I've people at work commenting that I should be buying silver at $20, my general response is "what does it matter if you buy at $26 or at $20, if the point is to hedge against hyper inflation". Being a terrible timer if the market, and not particularly good with statistical tools, i'm taking a long term view that the USD is already over valued and we'd better be prepared for a major correction sending gold and silver shooting up.

    1. I am more so expecting public involvement in the mania to drive prices sky high, rather than a hyper inflationary event.

      Most fiat currencies are over valued, the trick for the central banks will be to competitively devalue their currencies (and in turn the value of the large debt burdens) in such a way that things don't get out of control.

      Good luck to them, I will take my chances with the "people's currency", Gold and Silver.