Excitement has returned to the silver market as the sister metal of gold advances to highs not seen for ten months. Where is silver headed? Will it take out $21 with ease and head onto highs that evoke memories of 1979 or are we approaching a pivotal point?
Here is the background to this latest installment in the silver bull story as shown in the chart below. After a grinding bear market of 23 years, silver entered a new bull market on 21st March 2003. This bull will last 20 to 30 years as we enter an age of increasingly greater inflationary forces brought on by Baby Boomer retiree demands, Peak Oil and Silver as well as the underlying upwave of the well known Kondratieff wave.
In terms of technical analysis, we believe silver will trace out an Elliott wave impulse which consists of three upwaves and two downwaves. The first upwave called wave 1 (top of graph circled “1”) started on the 21st March 2003 and ended an exact Fibonacci 5 years later on the 21st March 2008. Silver is now in wave 2 (circled 2 in bottom right corner) and despite what you may read about a renewed silver bull, this is in fact a rally within this ongoing wave 2 correction. The reason we believe this is twofold. Firstly, it is unlikely that a 5 year bull move will be followed by a correction wave that only lasts 8 months (13% of the wave 1 duration). Secondly, silver corrections tend to be protracted as we can see in the smaller wave 2 and wave 4 corrections of 2005 and 2007 which you can see marked on the chart.
Our expectation is that this rally will approach the March 2008 highs of $21 but not decisively take them out. This is what we call a wave B rally. Wave A took 8 months to complete (another Fibonacci number) and this wave B will likely take as long to complete. If the wave B began in November 2008, we would expect it to finish sometime this summer.
Wave B will be a 3-wave affair with an initial upmove, a pullback and a final burst to a climax. The diagram shows these three components of the B wave rally as they unfold before our eyes. After that silver will experience another multi-month drop which will take it possibly down to the low $10s at worst before the final death throes of the wave 2 finish to usher in wave 3.
The fundamentals that will propel wave 3 will be similar to wave 1 as the economy recovers, silver demand picks up industrially but again inflationary pressures begin to bear as commodity demand from China and elsewhere tightens. The inflationary effects of the worldwide credit crunch bailout will also finally filter through but we also expect Peak Oil to finally and decisively appear and oil to breach $200 and beyond. Wave 3 will occupy most of the next decade.
Wave 3 will not be the biggest move which is reserved for the final wave 5 blow off which will happen in the 2020s. This will be the equivalent of the 1980 blow off and silver will by then be in the hundreds of dollars as peak silver now gets a grip as well as the US dollar sinking under the combined effects of the Baby Boomers bankrupting the Medicare and Medicaid systems. You will just not believe how silver will perform in those days ahead but for now it is enough to consider your increasing silver hoard and expect great things.
In the meantime, silver continues to whipsaw and entertain its old friend volatility in this deflationary correction wave 2. Those who buy silver now and have a 10-20 year horizon will not be disappointed. Those who live for the week or month are advised to hold onto their silver positions but expect a multi-month peak in the summer months ahead.