Silver Update

There are many ways to play the markets. Some do it for fun. Some do it for a living. Yet when you break it all down there are really four types of individuals who buy and sell.

The Investor – traders who don’t lose. They have such a remarkable understanding of the issues they purchase that any downside is both temporary and insignificant. The investor buys something selling for less than he feels it’s intrinsically worth and holds it as long as it retain its value. For the investor its all about possibility. Think Warren Buffett, John Templeton and .

Traders – those who try many things and intend to be successful with a larger percent of their portfolios. They calculate probability and intend to profit from it. Unfortunately, there are few traders who have been wildly successful. Think most of Wall Street, Hedge Funds and Joel Greenblatt.

Speculators – similar to investors, but take on slightly more risk (possibility of loss) and devote more time. They wait for the heavy hand and then bet big. Everything matters as much of their capital is on the line. They often use leverage to enhance their returns. Think George Soros, Jim Rogers and Carl Ichan.

(notice how I leave out the Gambler. If you just throw around you’re money buying hot picks and penny stocks intending to make a fortune then for you Wall Street might as well be located in Vegas).

I’m not sure where I stand. I bend most towards the investor category, but I’d be quick to admit that I’m not half as conservative as Buffett is.

I believe strongly that regardless of which class you associate your methods, the only road to riches is through saving frugally and investing diligently. No computer model will ever replace the investor. Till today there is suspicion that the Crash of 87 was caused by computer selling and not by genuine fear.

I base the decisions of any trade on three aspects: Fundamental Analysis, Technical Standing and Sentiment. The fundamental natures of the issue (supply/demand factors) are just as important as the charts (by this I mean price movement, not a bunch of lines sprawled over each other) and Sentiment (what the market expects of the issue in the future).

Of course one particular of the three may override the other two. Hence, if something is risky in nature but there is so much fear that it is heavily oversold, a short term rally may be in order and profits accordingly. Naturally that all depends of the mindset and tolerance of the trader.

So here’s my take on Silver (all of it)

I love silver. Not the metal, or the color, or the price, but the inherent value and the investment opportunity it presents. They say not to fall in love with an investment and believe me when I say I haven’t. If silver rallied and became heavily overvalued, I’d run to sell my bars.

However, I feel that it’s a long way out and that it won’t happen overnight.

The Fundamentals
I won’t go into great detail since if you’ve visited the blog before you’ll know that my silver articles outnumber my non-silver articles something like 3 to 1. I will just say that the fundamentals haven’t changed. If I woke up tomorrow morning and found out that some mine dumped over 500 million new ounces into the COMEX and the price fell in half I wouldn’t change. That’s because silver is undervalued by more than 500 million ounces worth (-50%). It’s probably undervalued by closer to 90%!

When silver rallied to $21.50 my friends asked me if it’s time to sell. I replied simply that although a pull back is likely (again I knew it was likely) I still felt that it had not had not overrun its borders (which at the time I felt were in the vicinity of $25-30) and I was not selling one ounce.

I don’t feel I made a mistake and I don’t regret not selling. If I was a trader that would be another matter altogether. But I am an investor, and at $20 silver is still a bargain. So how could $21 be a sell? I’d say neutral at most.

Needless to say, I’m buying. Many people own silver related issues thinking they own silver. The mindset that will prevail over the coming years is as follows: If you don’t have it, you don’t own it. Simply put, when you buy a silver fund you are merely giving your money to some institution to play with. Silver can’t default, silver promises on the other hand may.

The Charts
Buffett said he stopped following charts when he turned the charts upside down and got the same answers. Nevertheless, certain aspects are worth a look. For instance, as oppose to the rally of 2006, the March 2008 highs didn’t have the same hoopla and parabola as its predecessor. This signifies that the consolidation will probably be one of a shorter nature.

There seems to be solid support at the $16 level and unbelievable buying thrust at the $15 mark. Similarly, trading momentum has moderated and would attract heavy attention if any breakout is reached.

Sentiment
They say all bull markets begin in Denial, migrate in Acceptance and conclude in Euphoria. We are on the brink of this acceptance stage when traders begin to recognize the possibility for higher commodity prices in general, and precious metals advantages in particular.

I still have people tell me that silver is not going to $50 any time soon and that recession and a stronger dollar will bring prices lower not higher. These are the last of the deniers, as most have begun to accept the facts.

In a shorter time frame, many believe that gold and silver prices will now consolidate for months to come and that no immediate term rally is in the cards. (Interestingly, they feel the same regarding stock prices, in the sense that a decline is not imminent).

This tells me that the silver boom has much further to run.

It seems that we are at a very critical stage in the years long bull market in silver. A stage when have and have-nots clash and when perception collides with reality.

Many speculative manias begin and end in some sort of malicious scheme. The stock market boom of the 80s and 90s started with the manipulation of junk bonds and corrupt trading houses and ended with the same. My bet is that the commodities boom will be one of credit swaps and defaults. All credit crunches end when ultimately no one believes in a dollar anyone promises them. The saying “Show me the money” will once again stand as defense against any financial foul play.

They say it takes a good story to get a Bubble (a genuine bubble) started. It took a beautiful flower to get the Tulip Bubble on its feet and the advent of radio and broadcast to spur the 1920s. Silver has a great story. A saga of what people think they have and what their truly worth, a tale of one of the world’s most prized commodities undervalued heavily in terms of both supply and demand. One day silver may be a bubble, with no Hunt brothers to blame it on. But that day if far off… and when it arrives you’d have to be a fool not to believe it!

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