In Silver We Trust

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 |  Includes: AGQ, SLV
by: Patrick MontesDeOca

As far as the laws of mathematics refer to reality, they are not certain, and as far as they are certain, they do not refer to reality. Albert Einstein (1879-1955).

In an aggressive move the bank of Japan decided on Thursday to announce one of the biggest monetary moves in recent history. BOJ Gov. Haruhico Kuroda, on his inaugural policy-board meeting, announced an expansion of its government purchases including buying long-term debt.

Kuroda came into power during the worst deflationary cycle in the last 20 years the country of Japan has ever experienced. (NYSEARCA:JGBS) and other assets have been the main way the central bank has sought to help stimulate the economy and end the chronic price falls that have undercut growth.

The BOJ announced an expansion of purchases of government bonds. Under the plan, the central bank will buy JGBs so that their amount outstanding will increase at an annual pace of about ¥50 trillion ($530 billion). The steps are designed to boost inflation to a 2% rate.

The idea of imploding currencies or the currency wars scenario seems to be unfolding.

In a recent interview IMF Managing Director Christine Lagarde said, "Monetary policies - including unconventional measures - have helped prop up the advanced economies and, in turn, global growth. The reforms just announced by the Bank of Japan are another welcome step in this direction," according to a speech at a conference on the Asia economy in Hainan, China.

The odds are for the U.S. monetary policies to continue to support the economy with more record stimulus.

This is a high contrast to previous comments made by the Fed regarding its monetary policies in the U.S. The idea that the Fed is going to start to implement the exit strategy for the $85 billion monthly bond buying program in the summer of 2013 just went up in smoke with the latest unemployment data point.

U.S. jobs gains for March came in at the lowest level in 9 months - a gain of 88,000 new jobs vs. expectations for a rise of 190,000. That forecast had already been cut down from an earlier target of 195,000 new jobs after a batch of downbeat data this week.

According to Karl Schott, a metals bullion specialist with EMA:

"The jobs report has now shown us that we are not recovering as fast as the Fed expected with its previous economic stimulus and monetary policies. I feel that they will not be in any hurry to stop the monthly bond buyback program. The jobs rate at the lowest since 1998? ... is not actually a fact. We are just now seeing that there are less people looking for work that have been discouraged and have left the system. It seems this sector is increasing at an alarming rate and it is becoming the invisible generation that no one talks about. Small business owners and independent agents that do not qualify for government assistance are becoming the lost generation. This continues to support the idea that more immediate stimulus is needed, and that, in my opinion, will continue to support metal prices for gold and silver moving higher from these extremely oversold levels."

US debt continues to increase.

In the first two months of the current fiscal year that began on October 1st, the US national debt has grown $320 billion. That is $21 billion more than the same two-month period last year, which illustrates that the growth of the national debt continues to accelerate. The reason of course is the federal government's huge operating deficit, which is not getting any smaller. This point is illustrated in the following chart.

Silver COT report shows record short position by large speculators.

Interest by speculators in silver has waned in the past few months, as reflected by Commodity Futures Trading Commission data. In the March 26 weekly commitments of traders report, the most recent data, money managers' net-long position for silver sits at a mere 632 contracts for futures and options combined in the disaggregated report.

This is a dramatic fall from this year's high of 29,580 net-long contracts reached on Feb. 5. Since reaching that high, the net-long position for silver speculators fell each week.

Meanwhile, the gross short position for speculators has risen to 22,382 as of March 26, from 2,922 as of Feb. 5.

Extreme lows for the managed money net long positions are "usually associated with important bottoms for the price of Silver," said Karl Schott, a bullion specialist with EMA.

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

Daily Outlook

The May silver futures contract closed at 27.22. The market closing below the 9 MA (27.86) 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 27.40, it confirms that the price momentum is bearish.

Look to take some profits, if long, as we reach the 28.22 and 29.18 levels during the week. Buy corrections at the 26.44 to 25.62 levels to cover shorts and go long on a weekly reversal stop. If long, use the 25.62 level as a Stop Close Only and Good Till Cancelled order.

Weekly Outlook

If this week's lows (26.58) 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.

Conclusion:

Use these levels or lower to accumulate a long-term position in silver using proper risk and equity management tools. These historic levels are at extreme opposites of the fundamental factors discussed above. Use extreme caution if short. There is a high probability of a short covering rally to develop sooner than later which could materialize into a short squeeze.

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 SLV, AG, AGQ, GDX, PSLV, 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 therein constitutes a solicitation of the purchase or sale of any futures or options contracts.