Hi-Ho Silver, Away!

 Those who know me well have often heard me speak about precious metals, and silver in particular.  I have also mentioned a time or two that the silver market has been heavily manipulated, kept artificially low by the likes of JP Morgan and HSBC, who together, control 85% of the COMEX and London exchanges for this metal.  While I have mentioned these facts a time or two, I never really harped on them much because I didn't want to sound like a conspiracy theorist.  Well, the times do be a changing, my friends.  JPM and HSBC are now under investigation (finally!), the spot price of Silver is up roughly 50% since the beginning of September, and I think this is just the beginning of a much larger move.  If things continue as they have, I think we could actually see $100 per oz and perhaps much more.


Just bold words and empty promises? Maybe so.  I'll be the first to admit that I don't own a crystal ball, leastwise one that actually predicts the future, so my comments certainly aren't supported by the supernatural, but between QE2 and the recently filed suits against JPM and HSBC, things could really take-off.  I won't spend much time discussing either of these, as QE2 has been a recurring theme in previous posts, and there is enough printed in the mainstream media regarding the law suits, but if this is news to you, please click on these links for a couple of articles from Reuters, Forbes and Market Watch.

Below is a daily chart for spot Silver where we can see the meteoric rise in price since the beginning of September.

From a purely technical perspective, there are a few things I want to highlight here.  First of all, note the trend line support that we've seen since this rally started....clearly a bullish sign, as long as we don't breach this line.  On the flip side, I don't care for the double-top that we appear to have put in over the past week.  Double-tops are typically bearish, and could be foretelling a sell-off in the near future.  The good news is that we are rapidly reaching the apex of this ascending triangle pattern, so we should see resolution in either direction within the coming 10 days.  If we do breach support at the trend line, next support is $25.

Okay, so that's the technical story, and it looks like it could go either way based on the charts alone.  So why do I think silver could increase much more from here?  Here are five good reasons.

1.  Now that JPM and HSBC are under investigation for silver price manipulation via massive short positions, even small increases in price will result in margin calls on their shorts, which in turn will cause more buying as they cover their short positions.  Since these outstanding short positions are so massive in size, the resultant buying will also be large in scale, producing parabolic upward movements in price as they scramble to exit their shorts.  Notice the four days in the above chart beginning on 3 Nov., where price climbed from $25 to $29.50.  These are the four of  the biggest days (in terms of price movement) in the entire rally, and this happened as a huge number of buy-stops between $25 and $25.50 were blown away, causing margin calls and rapid short covering over the next few days.  I believe that we'll see this same sort of action once $30 - $30.50 is breached.

2.  QE2, otherwise known as "money printing", by the Fed results in more physical dollars available in the economy.  The more dollars available, the less the available dollars are worth.  While Bernanke and the Fed are trying to debase the dollar in an attempt to facilitate US exports and revive the housing market, they are also creating inflation in the cost of commodities, and guess what?  Yep, silver is a commodity, and it will continue to rise in price as the Fed prints more dollars.

3.  Silver, like gold, is a precious metal, and historically, a form of money.   Unlike Dollars, Euros and Pounds, you can't print endless quantities of silver.  There is only a finite quantity of silver available on this planet, so when governments start printing money like it was newspaper, people will want to safeguard their wealth by purchasing physical silver and physical gold.  Why?  Because from ancient times to the present, these metals have always held a specific value and they always will.  Silver and gold are traditional flights to safety during tumultuous times, and will typically see significant price increases as a response.

4.  Unlike gold, silver is both a precious metal and an industrial metal.  This means that it is in demand by large manufacturing corporations in order to produce their products.  This industrial demand, when coupled with the flight to safety demand, will further squeeze the supply of physical silver available for purchase.  Going back to Econ 101 - high demand + low supply = higher prices.

5.  Finally, there has been a historical standard ratio of gold to silver prices that has been completely blown out of whack, thanks to almost two decades of artificial price manipulation by JPM and HSBC.  This historical ratio was 15:1, meaning that the price of gold was typically 15 times that of silver.  If the market price of silver moves back to this historical ratio, gold's recent price of $1,370 per oz would imply a price of $91.33 per oz for silver.  That's quite a move from where we closed on Friday at $26.70 or so.  Now consider the implications when there are a lot of credible people predicting gold will eventually surpass $5000 an ounce!

So, a lot of interesting information, but what can we do with it?  First of all, I've been recommending to friends and family for quite some time now that you should own physical silver.  This is silver that you buy and store yourself.  I own silver at various prices between $12 and $18 that I have purchased from www.apmex.com, and I would recommend them as a reputable dealer.

In terms of speculation, you can either trade silver futures contracts or purchase the silver ETF, SLV.  I did quite well buying December call options on SLV back in August, and I think a similar purchase of out of the money call options for March will pay out handsomely as well.  Eventually, I think that the SLV and the silver futures contracts will all get wiped out, as they are nothing more than paper derivatives used for speculators to trade on the value of the underlying asset, so I do not recommend buying these as a long term, buy and hold asset for your portfolio.  If you want the long term security, buy the physical silver. 

I'm not going to post specific plays at this time, but if you want one, drop me an email and I'll tell you what I have and what I'm considering.

Hope you all had a great Thanksgiving weekend.  Should be an interesting week ahead. Good luck trading.