A Long Over Due Update on Silver

For anyone who has been in silver for the past six months, you are currently riding quite the profit wave, so the Silver Surfer image to the left seemed somewhat appropriate as we proceed into the last two weeks of 2010.  The question, as usual, is what happens next?  Does the wave come crashing down, or does it continue to grow and develop momentum as it heads toward shore, ideally forming the perfect barrel that seems to stretch forever, providing those who caught it, the ride of a life time?  My money is still on the latter, quite literally, in fact.  Step inside for a recap, and decide for yourself.


Let's begin once again by taking a look at the most recent chart of spot silver.   As always, this, and all charts on my blog are click-able for an expanded view.

 A brief recap for those of you who are first time readers of my recent posts on silver.  Starting from the far left of the chart, you can see that we were stuck within a pretty tight trading range from May through August of this year, never really being able to break above 18.75/oz for any length of time before getting beat back down.  Then towards the end of August is when we heard the first official rumblings from Bernanke and the Fed about the potential for QE2.  It was at this point that the stock markets took off, as did silver and most other commodities.  The chart above shows that spot silver peaked recently at $30.69, at which point the manipulators aggressively beat price back down, as a close above $30 threatened them with serious margin calls, not to mention blowing through a lot of their buy stops sitting at $30.50.

Price peaked on Dec 6th, and since then, we have formed a bullish pennant pattern (annotated in purple), as price has consolidated between $28 and $30.  As you can see, the range has been getting tighter over the past several trading sessions, indicating that either a break out, or a break down is coming soon.  Should price break down below $28, expect to see strong support along the trend line that has held firm since the summer time.  On a break out, expect to see JPM and the manipulators put up a fight again around $30.50, but once they've been put on their heels (which they eventually will), I would expect to see $35 and then $40 in short order.

For those not familiar with my earlier discussions about silver price manipulation, please refer to the following link, Silver Manipulation, for a comprehensive discussion on this topic. 

Now back to the meat and potatoes of this post.  Where will silver go from here.  This is one of the few areas in the entire realm of investing possibilities where you will hear me say, "just watch the fundamentals".  In the case of silver, the fundamentals are very compelling, and they boil down to this one simple question -

Are Ben Bernanke and the Fed continuing to print money (QE1, QE2,.....QE-Infinity)?

If the answer is yes, the price for gold and silver will keep rising.  It is simply impossible for hard assets not to increase in value against a fiat currency when the "powers-that-be" continually increase the quantity of fiat currency in the system.  It's basic economics....as additional money enters the system, the value of the existing money decreases, which means it takes more money to buy hard assets.  Keep in mind, this is exactly what Bernanke and Co. are trying to accomplish...pushing up the price of assets, particularly that of single family homes, in a vain attempt to reflate the banks out of the mortgage market death spiral currently sitting on their books.  Well Ben, you can't have it just one way.....when you attempt to inflate pricing across one asset class by printing money, you automatically inflate pricing across almost all other asset classes as well. 

The thing that you all need to keep in mind is that trading precious metals has always been a very volatile undertaking, and when you couple that with the current political, economic and legal issues confronting our markets, this volatility will become even more extreme.  Translation:  we will see huge parabolic rises in price, followed by wicked sell-offs.  The key is to be a buyer of physical silver over the longer term, and not let yourself be swayed by the euphoria of a rally, nor the gut-wrenching usually associated with a sell-off.  If you try to speculate with silver futures contracts, or options on silver ETF's like SLV, you could easily get burned in the short term, so if you want to go this way, keep your position size small, and concentrate the bulk of your silver position in buying the physical....buy the dips.  As long as the answer to the fundamental question above remains, "yes", the silver wave will continue to barrel and those on board will indeed experience the ride of a lifetime.

 
Good luck trading.