Seeking Alpha
What is your profession? ×
Profile| Send Message|
( followers)

"Silver is The Investment of this decade" - Eric Sprott

In a recent interview with mineweb, Eric Sprott (Sprott Asset Management) made this comment:

"This will sound like a conspiracy theory, but unusual things are happening in the gold and silver markets.

For example, on Feb. 19, nearly an entire year's supply of gold traded on the Comex in a single day. The same volume of silver trading happened on the commodities exchange.

You and I both know that the people selling that much metal cannot deliver it because it is just not available. Yet somehow they are out there, pounding down these contracts and keeping the price suppressed.

I would hypothesize that the central bankers know their policy of printing money is the most irresponsible thing imaginable, and they are suppressing gold and silver prices to hide their irresponsibility. When one is printing that much money, gold and silver prices are the first things you would expect to rise.

If we saw gold going to $2,000/oz, the price of oil would probably go to a new high and the price of agricultural commodities would go up. Then you would have a huge inflation problem on your hands.

Based on my research, I believe the Western central banks have been surreptitiously supplying gold to the market. I say this because the demands I see for physical gold are way beyond the supply of gold.

The annual gold supply has not changed in 12 years, and demand just keeps increasing from China, India, the U.S. Mint and silver and gold coin sales; even the non-Western central banks are buying gold. Where is this gold coming from? I think the Western central banks are selling gold to keep the lid on the price so everyone thinks their monetary policies are benign. Nothing could be farther from the truth."

Now, let's examine how investors are allocating their investments between gold and silver. The data above is from the US Mint showing gold and silver sales in ounces.

As you can see, investors are choosing to buy silver at a ratio to gold that is well above what is available. This uptrend does not show any signs of slowing either. The ratio of the physical silver to gold is both rising and extraordinarily above the availability ratio of 3:1.

If we examine ETF holdings in both gold and silver, we note that in the period from 2007 to 2012, the increase in silver holdings amounted to 12,000 tonnes, compared to 1,200 tonnes of gold - meaning, investors purchased ten times more silver than gold.

The silver market tested the $28 levels last week and found some major physical interest that reversed the bearish market trend 70 cents higher in a matter of minutes. This rejection was accomplished from the daily low of $28.08 to close near the highs at $28.74, successfully testing the level of support we have been mentioning for the past 30 days.

This is very strong indication where the physical buying has been identified for the time being. I have been saying for weeks that these levels should hold as it is a major Gann long-term trend line price support. So far the market has consolidated in the range of $27.93 to $29.50 .

Investopedia defines consolidation in technical analysis as the movement of an asset's price within a well-defined pattern or barrier of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset breaks beyond the restrictive barriers. Periods of consolidation can be found in charts covering any time interval (i.e. hours, days, etc.), and these periods can last for minutes, days, months or even years. Lengthy periods of consolidation are often known as a base.

The levels of resistance and support within the consolidation are created through the upper and lower bounds of the stock's price. Once the price of the asset breaks through the identified areas of support or resistance, volatility quickly increases and so does the opportunity for short-term traders to generate a profit.

The bull camp might take some solace from the minor rise in open interest over the last several weeks, especially in the face of a noted sideways consolidation, but some technicians might conclude that the recent action instead signals confidence in the bearish camp.

Let's examine the silver AGQ ETF and see what live trading opportunities we can identify for next week.

ProShares Ultra Silver ETF

For the aggressive investor, the ProShares Ultra Silver ETF seeks daily investment results that correspond to twice the performance of silver bullion, as measured by the U.S. Dollar fixing for delivery in London.

Daily Strategies

The AGQ ProShares Ultra Silver ETF contract closed at 37.75. The market closing below the 9 day MA (41.04) is confirmation the trend momentum is bearish. A close above the 9 MA (41.04) would negate the weekly bearish short-term trend to neutral. With the market closing below the VC Weekly Price Momentum Indicator of 38.04, it confirms the price momentum is bearish.

Look to take some profits, if long, as we reach the 38.97 and 40.19 levels during the week. Buy corrections at the 36.81 and 35.86 levels to cover shorts and go long on a weekly reversal stop. If long use the 35.86 level as a Stop Close Only and Good Till Cancelled order.

Weekly Strategies

If this week's lows of 37.10 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 intermediate to longer-term outlook:

1. 89.37

2. 106

3. 130

A close above 130 puts into perspective the upper end of the target zone of 178.

TRADING DERIVATIVES, FINANCIAL INSTRUMENTS AND PRECIOUS METALS INVOLVES SIGNIFICANT RISK OF LOSS AND IS NOT SUITABLE FOR EVERYONE. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, SLV, PSLV, PHYS, AG, SLW, GDX, GLD 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.