The Real Silver Lining

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. – Ben Graham, 1949

The following is a slightly more in depth analysis of the silver market for those who are edgy as to where we stand and why I remain as bullish than I ever have been. First let us backtrack exactly one year. It was August 2007. Gold and Silver had been in a serious consolidation since May 2006. Few investors were coming to market and analysts were getting tired of plugging the silver bull. Nevertheless, there was much speculation for months already that the next leg up in the long-term trend would begin around September/October. Just then, silver plummeted overnight from $13.50 to just under $12.


Ignorant Support

Support then was at $10 hence many critics were calling for a retracement to that level. Then as now silver crashed through its 200 Day Moving Average, a well known support line. To belie
ve that silver must fall to the lower support level ($14) simply because the higher one ($16) has not held is foolish and investors who wait for such an event can prove costly. $21 will be the new support fairly soon and anything below $18 will be considered cheap.

Relative Strength Then as now, Silver is heavily oversold. (Silver’s RSI – Relative Strength Index – has not been this low over the past 12 months).

Gold Silver Ratio It is interesting that during that August 2007 sell-off the Gold/Silver ratio jumped to 56 and held above 55 before for a few months before declining back to below 50. Remember that the Gold/Silver ratio is in a multi-year down-trend and these upward fluctuations are mere noise.


Seasonal Strength
July and early August are historically weak months while late August and September exceptionally strong months.

Other Factors

The U.S. Dollar – The Dollar is now overbought and has not been so in ages. This may be the final blow-off of the Dollar rally and may now lead to its (ultimate?) downfall. Recent strength may surely be the intervention of the government trying to save the last currency since the Civil War. (For those who think the idea is tin-foil-hat-like read the next sentence).

COMEX Short PositionI’m no conspiracy theorist but I do sympathise with “survivalism”, and that is what we may be witnessing. Anyone who knows how to read a COT report can see that there is serious trouble on the short-side of the silver market. With barely 70 million ounces of investment silver a year its hard to imagine where these short will get a hold of over 300 million ounces of silver. Pretty much anything you answer will prove bullish.

Inflation – The PPI, Price Producers Index (that usually leads Consumer Prices) , has just come out with multi-decade high increases. The fact is that while retailers of all sorts and industries have attempted to hold off increasing prices, that range of revenue vs. profit has just about vanished and the choice is no longer theirs. Expect surging costs and with it surging precious metals prices.

Sale! Many, including India and China, were fretting over the fact that Gold was too high and pushing jewelry, a Eastern culture staple, to incredibly exuberant prices. As luck would have it they got what they had asked for (or manipulated?).

Sentiment Positive interest in Gold and Silver is just downright awful. Analysts (who I have noticed have simply become Chartists) are at a loss as to what to do. But with the fundamentals more bullish than they ever have been (think U.S. Budget, economy, inflation) I see nothing but a G-d given opportunity. (Nevertheless, I still find it incredibly ironic that the little bullish sentiment can be found on none other than… Marketwatch!)

Recession
Gold and Silver’s day in the sun will probably be when the recession begins and consumers begin to really feel the brunt of the economy and whiplash of falling wages, employment and earnings/share prices versus rising costs, prices and defaults.

Dow/Gold Ratio – I put this one last since it should be so readily presumed and stands at the center of the long term downtrend in debt-laden share prices and uptrend in unfinanced asset prices. The trend remains intact at 13.59. Any surprises will likely be to the downside heading to a ratio of 7, or even 3, before this recession is over (has it started?).

Conclusion
If you own anything that is long-term bullish in the face of credit crunches, paper deflation, asset inflation and fear (namely Gold, Silver, Yen, Franc, Short ETFs) you are probably destined to see some nice returns in your portfolio over the next few months.

The key words are: Negative Financing.

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