Silver Breakout in October?

The Element of Time
If the fundamentals of an investment are the rules of the road, then timing it is your depth perception. I firmly believe that just as the better the depth perception the better the driver, so too the better the timing on a trade the better the investor. Notice that timing in general, as well as trading, are speculative by nature.

Anything could happen at any moment but if one wishes to speculate, let him begin with timing as oppose to, say, a basket of worthless CDOs. This is what we’ve been attempting to do over time and this coming autumn is the real test.

We’ve been speculating for months now in a breakout above the resistance level of $15 for sometime in September. We have two instances in recent history, the first from the 2 secular trends and another from 2 cyclical trends.

A Secular Inference
In the 1970s we saw a situation quite similar with that of today. Stocks were making new highs, sentiment was good even though the economy was slowing, appetite for risk was high, commodities and inflation was on a rampage, being closely followed by interest rates while the precious metals were just tagging along with the asset boom.

[In that era, gold saw its value rise from a suppressed low of $35 an ounce to over $800. To put that into perspective it would be similar to gold advancing to an unadjusted $6400. Now realize that it doesn’t seem all that irrational considering that the Dow at the time was hovering just a bit above 800. Besides, news of gold manipulation in modern times wouldn’t surprise me the the least.]

This does tell us two things predominantly. One is that nothing, even gold and silver, moves in a straight line. There are many technical cycles within the fundamental cycle and even though all the fundamentals are strong or even getting stronger, each day’s trading may not express that.

Two, it seems that in place of the standard boom-bust companionship observed in financial issues, commodities and particularly precious metals work in a rather boom-consolidation phase. This is because goods are actually used in industry in addition to mere speculation. Entailed within, dealers and miners may need weeks or even months to de-hedge and accommodate new higher prices.

A Cyclical Inference
In this bull market alone we have seen the above paradigm displaying an interesting observation to those familiar with the industry. For instance there have been 3 major rallies since the bull market began. The first, similar to the 70s, was a mere blip. Prices soon fell back to their previous levels almost completely erasing any gains from “Irrationally Exuberant” 1997 until 2002. The next rally began in October 2003 and consolidated through to September 2005. It is interesting to note that all these rallies began their ascent in either September or October of their respective years.

Thus, it seems that silver and gold may be in a strikingly similar pattern. The rally that began in late 2005 was completed in May of last year and has been consolidating between 10 and 15 since. The past year and a half we have seen a number of technical indicators that seem favorable for a rally in the near future.

a) A sustained rally cannot occur amidst excessive optimism – this may explain why the 1997 was unfounded. We have seen the many investment banks, brokerages as well as the media lessen its overall hype on the Precious Metals.
b) Late in the consolidation stage speculators became either restless or even bearish on the potential for further profits. This obviously welcomes a wave of speculative momentum traders and funds into the arena pushing the metals higher and further than ever before. We see this.
c) Many Central Banks seem to wait around for higher prices for a while and then seeing no immediate recovery sell their ever more profitable gold to diversify into holdings of better return.
d) Many traders seek for trend lines and dig through technical analysis, candlestick charts and whatever have you to make every bit of profit off of a otherwise bland correction. It is when these trend lines have been broken as we have recently seen that these traders also abandon hope of immediately higher prices.

For those seeking resemblance from the previous precious metals boom see these two posts, Silver Ready to Spring and What’s going on in the PMs. Just look at the charts. It’s just important for the silver investor to realize that what we see this week may, pr may not, be the bottom of a consolidation channel – figuring that even when prices decline to the bottom in September it should be slightly higher.

Waiting for a Sale
Many analysts are now speculating or even eager for silver to break support in favor of lower prices around the $9-10 area. This is foolish for a number of reasons.

Primarily the catch is two-fold. If you are a fundamental analyst than why wait for $10 when we had $12.10 this past week. Trust me when the market rallies and silver hits the high double digits, the daily moves of $2-3 aren’t going to matter in the slightest. If you are a technical analyst than you are following the crowd. In the case where silver breaks below $9 will be met with such diverse opposition and support that it will almost be impossible to make an honestly unbiased trade.

Then let’s consider the possibilities. what if we don’t see $11 forever? The traders sitting on the sidelines will be toast and have hypothetically placed in a short sale, albeit psychologically, and will be forced to buy at much higher prices.

The second reason, is that you must consider that if so many technical analysts are awaiting lower prices, it may be that lack of demand influencing the selling has already been filtered into the market price.

The Dollar
Additionally, many buyers purchase gold and silver as a hedge against inflation and a falling dollar. This being the case, these hoards will not be sold quickly, thus creating an almost concrete support under the market price – which may not be as low as many expect.

The Rally
Many traders fail to consider the degree of aptitude in these rallies. For instance in 1997 no one would have guessed that the mysterious strength in silver was due to buying from one of the largest investment firms on the planet – Berkshire Hathaway, run by none other than Warren Buffett. In the subsequent rallies we also saw buying from major funds of such stature. Likewise, in the coming rally no one can be sure who will be buying, Buffett, China, Blackstone for all I know? But one thing is for certain. You will find out after they have bought not before or during.

Once again, much of the above is random guesswork. It will be interesting to see of the metals break out above their previous – and soon all-time – highs by years end.

If you are interested in trading the metals look out for strong buying the next rally may be underway. Watch for: signs of a weaker Dollar, excessive pessimism, change in monetary policy, institutional buying, or any major catalyst such as a hedge fund blowup or terrorist attack.

If you are an investor and have already cashed in your profits from the credit boom stand by as it unravels in ways you can’t possibly imagine. Trust me when I say Bear Sterns was just the beginning. The coming debacle may possibly make Enron look like a walk in the park.

When the average Joe Boxer begins believing everything Mike Shedlock and Jim Rogers say, take the time to consider your bond portfolio.


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