When Will Silver Breakout?

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Includes: AGQ, GDX, GLD, PHYS, PSLV, SLV
by: Patrick MontesDeOca

A Boom in Silver and Gold Predicted: An Excellent Play in a High-Probability Area

Equity Management Academy analyst Steve Roy has been analyzing silver, gold and precious metals and he predicts a "hyperbolic" move in the precious metals.

On a recent interview, Mr. Roy found that in analyzing monthly moving averages and long-term Elliot and Fibonacci waves, April 29, 2011 marked a top of a third wave in the silver market. Since then, silver has been in a correcting fourth wave. With the coming of 2013, the market is poised for a fifth wave up. Mr. Roy said,

I believe this wave, starting in the first quarter of 2013, will take us much higher moving forward.

Long, medium and short term moving averages are all moving together now, Mr. Roy said, poised for a big move up.

We are seeing extremely good, positively good chances for a major move up.

Calling it an "excellent play in a high probability area," Mr. Roy projected a high in silver of 51.52. Silver is currently (Jan 30,2013) trading in the low 30s.

When will Silver Breakout?

Mr. Roy's analysis has led him to believe that the breakout to the upside will occur sometime this year, certainly by the fourth quarter, but probably sooner. He warned hesitant investors that the third wave of a larger fifth, which is the wave he is predicting, is the most impulsive and usually has the largest and quickest move up.

The Fundamentals: Debt, Deficit

Besides technical analysis to support a big predicted move up in silver, there are ample fundamental reasons for a swift and major move up in the precious metals.

The debt load worldwide is starting to strike everybody as a major problem and precious metals, including silver and gold, closely track the amount of debt in the world. As deficits and debt have continued to increase, the value of gold and silver has closely tracked that increase.

Gold is also beginning, once again, to be seen as a risk-less investment, even as sovereign debts based on paper currencies appear more and more risky. Governments classify sovereign debt as risk-less, but, Mr. Roy argued:

We all know now that sovereign debt isn't worth the paper it's printed on. They print money based on thin air, and as long as people buy the story, that money will have value, but once people start questioning whether the governments behind that money have the ability to pay, then it becomes valueless.

He mentioned the Euro crisis as a possible first sign of lack of faith in paper or fiat money.

Bonds

Mr. Roy sees an increasing chance that interest rates will rise. As the Fed prints more money to prop up the system, the stock market rises as more dollars chase fewer opportunities. Over time, the dollar has been devalued by the markets, with the dollar index slowly declining over the past few decades. Since 2002, when the dollar index was at about 122, it has fallen now into the 70s. Gold really started to take off as the dollar index fell. If the dollar index moves another leg down, which Mr. Roy expects, it should push gold and silver much higher.

USD US Dollar Index

Various groups around the world are talking about alternatives to the US dollar as a global currency, and gold is likely to play a role in such a change in the international financial system. The Bank of International Settlements recently started using gold as a tier one asset; meaning it is seen as risk free. With more and more people becoming skeptical of sovereign debt as a risk free investment, gold is becoming part of more investor's and country's investments.

Inflation

The influx of "free" money from the Fed may lead to inflation or even hyperinflation with too much money chasing too few goods. One area reflecting inflation already is commodities, which have been rising. Oil hit 147 in 2008, only to rally even higher in 2011. It appears to be only a matter of time before commodities in general are ready for another move higher, especially if inflation takes off. Mr. Roy said:

The Fed thinks they can control it (inflation), but they are always behind the curve. By the time they do anything about it, it will be too late.

CRB INDEX

The Near Future" "A Fun Ride"

Overall, Mr. Roy predicts a major move in precious metals in the first quarter of 2013, as well as a sharp rise in commodity prices, with interest rates possibly also going up.

We are preparing for a generational move, which we'll be able to invest in," Mr. Roy said. "It will be a really fun ride if you're on the right side it.

Disclosure: I am long AGQ, GLD, PSLV, PHYS, SLV, GDX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.