The "Stuck In Munich" Update (Silver, Currencies)

I was supposed to fly back to Atlanta yesterday, but Delta got spooked by a little winter weather that was expected to hit Atlanta on Sunday evening between 7:00 and 9:00 PM, so they canceled my flight, which had an expected arrival time of 2:30 PM.   To make matters worse, they also canceled all Monday inbound flights into Atlanta from Europe, so here I sit, hopeful that my newly re-booked flight for Tuesday doesn't get whacked.   All things considered, things could be much worse...at least I'm not stuck at the airport or in a hotel. 

Second order of business, my apology for not providing more regular posts last week.  Mrs. SingleMalt needed to have shoulder surgery performed last Tuesday, and since then, I have been busy driving back and forth to doctor's appointments and physical therapy sessions, while also trying to work remotely at my day job.  Needless to say, not a lot of time left over to do more than casually glance at the markets.  Even today, my time will be very limited, but I do want to provide a quick update on silver, since the action has been rather severe subsequent to my last post.


First, a look at the daily chart to give us some perspective (click to enlarge).

One of the things that had me concerned last week in my previous two posts was the potential for a price raid by the "establishment", in a last ditch attempt to hold the $30 - $31 level.  Although we started the year trading well over $31, my concerns were quickly validated over the following days, as the paper short sellers massed an attack on silver that brought price as low as $28.50 over the course of the week.  At this point, we seem to have established good support...actually, $28 - $28.50 is the support range that I feel is key right now.  If we close below $28, we will likely trade back down to $25, but I think the chances of $28 failing is less than 35%.

What this looks like to me is nothing more than a correction.  Note as annotated in the drawing, we had a similar sell-off and correction back in November, before price continued on it's march to new highs.  I believe this to be a much more likely scenario for the simple reason that nothing has changed.  Yet.  Bernanke and the Fed are continuing to monetize Government debt via almost daily POMOs, which as discussed in previous posts, is increasing the supply of US dollars in the system and therefore making our existing dollars less valuable.  We have seen some recent strength in the US dollar index (DXY), but most of this has been due to renewed fears coming out of Europe that Portugal is reaching a point of critical mass and will be the next domino to fall, closely followed by Italy and Spain.  This has caused the Euro to take quite a beating over the past few days, now trading back below $1.30 against the dollar, and giving the appearance of dollar strength. This is only perception however.  The dollar is just as sick now as it was three weeks ago, and when you add an ongoing dollar debasement program, courtesy of the Fed, it will only get worse.

So what does this mean, and what should you be doing?

If you are an investor in silver (i.e. you purchase and take delivery of the physical metal), you sit back, relax, and buy the dips.  As previously posted, I am convinced that we will see silver trading over $100/oz at some point in the next 12 - 18 months, so one should not be concerned about corrections like the one we're experiencing right now.  In fact, from the investor perspective, I would be thrilled if the short-sellers could take us back down below $20, as it would give me the opportunity to buy even more.  The key is to be a regular and steady buyer in modest quantity, not a one time buyer of massive quantity.  Dollar cost averaging in the case of silver is still a valid concept.

If you are a speculator (i.e. you are trading options on SLV or buying/selling contracts on the COMEX), taking on a small to modest sized long position at the current support level with a mental stop set on a close below $28, would be a decent risk/reward play now.

Macro things to keep in mind this week that could impact the markets (equities, forex, commodities):

1.  The Fed will release their new POMO schedule for the coming month this week (Tuesday, I think).  Watch the levels here - if the Fed announces a schedule that will monetize significantly less debt than they did in the past month, we could see further dollar strengthening, and that will typically be unfriendly to gold and silver prices.  If on the other hand we see the same level, or higher, on the POMO schedule, gold and silver will likely continue their rallies with a new leg higher. 

2.  Watch the news coming out of Europe, in particular, the spreads on Portugal bonds (to the German Bund).   If and as spreads exceed 500 basis points (bps) and increase to the 700 bps level, we will witness another "Greece"/"Ireland" event, which will be negative for the Euro, and though good for the US dollar, likely also good for gold and silver.   Based on all of the research I've done, it's no longer a question of "if", but "when" will Portugal get bailed out (the same for Italy and Spain).

All for now....hope to be posting from Atlanta again later in the week.  Auf Wiedersehen -SMT