Is $26 Silver Possible?

Includes: AGQ, PSLV, SLV
by: Patrick MontesDeOca

In a recent report I published in Seeking Alpha, I explored the possibility of silver dropping to $26. In this report, I said:

"The $28 to $28.50 price levels serve as a maximum extension for this correction using Gann Trend lines. It confirms a major level of support based on the downtrend line support extension starting from the November/December 2012 lows, and connecting the January 2013 low measures almost to the dime (a pre 1964 dime that is!)."

I also commented:

"Our 2013 proprietary cyclical wave analysis indicates a bottom occurring in the February 15 time frame with a strong rally into the time period around April 15, 2013. This would be the ideal synergy when prices should test the upper end of their projections. What will determine how fast and how high silver moves nobody knows, but current conditions are a perfect storm for this pattern to turn into a buying frenzy."

So far the first bottom was made on February 19th, at 28.32. On March 1, a new low was made at 27.93, exactly into the major area of support identified above. Since the early March lows were made, the market has consolidated between the 27.93 and the 29.50 level of resistance.

The idea that silver can drop to the $26 levels has been minimized greatly by the recent developments in the small island of Cyprus. This is a worldwide major fundamental paradigm that could signal the shift in perception from complacency to fear and panic.

The concept that any government large or small can steal your money or as they call it "levy", has become a reality sooner than I expected. I have been writing about this subject matter in many of my reports and interviews trying to put a clear and transparent perspective to what is being told otherwise by the arrogance of the propaganda machine.

Cyprus has agreed with EU/IMF lenders a 20-percent levy on deposits over 100,000 euros ($130,000) at leading lender Bank of Cyprus and a 4-percent levy on deposits of the same amount at other lenders, a senior Cypriot official said on Saturday.

It seems that central leaders have decided to take the same measures that Mexico or Argentina has taking in the past - to steal it from the people through inflation (a slower and gradual process), or if under stress (Cyprus), to raid and subsidize banking and industry by unexpected overnight devaluations or putting into place capital controls to potentially stop flight of capital. In the early 80's Mexican citizens lost more than 50% of their purchasing power overnight.

History can verify other examples by empires that have followed the inevitable pattern - to print unlimited amounts of money and in doing so implode its currency - and the total collapse of the monetary system. A wider policy measure like Cyprus could potentially start and ignite currency wars or civil unrest throughout the region. Something the EU central leaders can't afford to risk.

In a recent interview Steve Roy, Chief Technical Analyst for the Equity Management Academy 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. Over time, the dollar has been devalued by the markets (a certain sign of hidden inflation), with the dollar index slowly declining since a high of about 120 in 2000/2001, and a record high of 165 in 1984."

Since 2002, when the dollar index was at about 122, it has fallen now into the 70s. As the dollar index fell, gold really started to take off as a hedge against inflation. If the dollar index moves another leg down, which Mr. Roy expects, it should push gold and silver much higher.

Recently I asked Eric Sprott (Sprott Asset Management) if he thought silver was still the best investment of the decade. He said:

"I absolutely do, and the one thing that most strikes me when I look at, for example, the US Mint web site, and I look at the dollar value of gold sold and the dollar value of silver sold, and I see that investors bought as many dollars of silver as gold, which means they bought 50 times more physical silver than they bought gold because the price is over 50 to 1.

But when we look at production of silver, there is about 11 times more production of silver than there is gold, but half of silver's production goes to industrial production, whereas almost all gold production is for savers, which then takes a ratio of about 6 and a half ounces of silver you can buy every year for investment versus one ounce of gold but people are buying it 50 to 1.

When we did the last (PSLV) (Sprott Physical Silver Trust ETF) issue, we raised $320 million. We did the last gold PHYS issue and we did $349 million. For all intents and purposes, almost the same amount. Okay, we almost bought about 50 times more silver than gold.

How can investors buy silver in a ratio of 50 to 1 when it is only available at six and a half to one? That cannot last. So that's why I think, you give it time and you take the paper guys out of the market, the Comex and all this ridiculous trading of paper silver that goes on, the physical story will win out and we will go back to a more normal ratio, such as 16 to 1. If we go to 16 to 1, silver will triple the performance of gold, and gold will have a great performance as well. It is a super-charged story."

The fundamental picture seem to be getting stronger everyday. The eurozone crisis takes center stage in what is an ongoing saga of political and economic blunders. There are very few solutions left.

The prior economic policies have failed. So, investors have to realize that your hard earned money is no longer safe in any part of the world. The third party risk is greater than any other time in the history of the financial markets. You have to prepare for the worst case scenario by accumulating silver and gold at current levels.

Let's take a look and see what live silver trading opportunities we can identify for next week

The May silver futures contract closed at 28.73. The market closing below the 9 MA (28.88) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bullish short-term trend to neutral. With the market closing below the VC Weekly Price Momentum Indicator of 28.80, it confirms that the price momentum is bearish.

Look to take some profits, if long, as we reach the 29.10 and 29.47 levels during the week. Buy corrections at the 28.43 to 28.13 levels to cover shorts and go long on a weekly reversal stop. If long, use the 28.13 level as a Stop Close Only and Good Till Cancelled order.

If this week's lows (28.40) in silver are not violated by closing below this level on a weekly basis, we can build a strong argument that the lows are in and the foundation is in place to support a larger move to the upside.

If the lows of this week hold, it will support a rally into the following Fibonacci target areas over the short term:

1. 29.65

2. 30.20

3. 30.75

A close above 30.75 puts into perspective the upper end of the target zone of 32.53. A weekly close above this level would set the stage to challenge the 34 to 34.50 highs made in November 2012.


Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLW, AG, AGQ, PSLV, SLV, GLD, PHYS, GDX over the next 72 hours. 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 herein constitutes a solicitation of the purchase or sale of any futures or options contracts.