As the U.S. Silver market opened on December 31, 2013, more than 7,500 contracts were sold pressuring prices to a new low of 18.72 during the early morning session. Upon which level it discovered a massive support of physical buying interest that propelled the market to more than a $1.00 move higher off the lows in less than 90 minutes in fast trading conditions. A massive short covering took silver to a high of 19.825, and closing at 19.425 as I write this report. This is a clear sign that price for the third time this year has identified where the floor of support has been set by the real physical demand and market value players.
For reasons that differ other than the objectives in a real free market enterprise (that uses the basic metric measure of price on real supply and demand data), the metals (paper futures markets) have distanced themselves from traditionally applying and following this basic law of economics 101.
This week, our LIVE Trading room at the Equity Management Academy published a recommendation for our subscribers to purchase silver at 19.03 or lower. Subscribers received this information yesterday for today's action - so we were well prepared to execute our buying trigger points today December 31, as indicated on the report.
In a recent report published on Seeking Alpha, I commented we were expecting some kind of bottom to take place between December 23/24 and that signal is still very valid as the low today successfully tested the previous low of 18.89 made on December 5, 2013. We were prepared as the window of opportunity to cover our shorts was there. I am not making any claims of being able to pick tops and bottoms by any stretch of the imagination but by using The VC Price Momentum Indicator, we have averaged a 100% gain in profits for 2013. This is documented in our LIVE track record performance for 2013, and that speaks volumes in itself.
Our published weekly VC Price Momentum Indicator posted on December 29, recommended to cover shorts at 18.97 on a weekly basis and reverse to a long position using the 18.97 as a weekly protective stop loss. A close below would usher the possibility of testing the 17 price levels. If this level is reached, I would call it a divine gift, as prices are well below the cost of production and could become very difficult to actually purchase physical silver without a large premium cost attached to it. This would inevitably precipitate a self fulfilling prophecy of creating a shortfall in production.
With the price well below the cost of production and the long-term cycle in interest rates changing (higher rates), it might become a very difficult environment to finance future production. As prospects for global economic growth increase, this will support a record physical demand to continue to increase in the foreseeable future. A shortage of supply mentality might develop as demand shifts to silver from a speculative demand base product to an industrial demand based product, putting tremendous pressure on the shorts.
One of the great aspects of using The VC Price Momentum Indicator, a proprietary trading tool created by the Equity Management Academy, is that it allows me to wait for the price to come to me in order to identify and trigger a signal. This way, I don't have to chase the market or trade at random. I find that it allows me to be more objective about my trades and use less emotion during the execution process.
As a long-term student of the markets, emotion can be your best friend or your worst enemy. It chips away at your confidence level to a point that it can paralyze your decision making process and leave you in a position of desperation. Desperation, fear and greed are the underlying elements that feed and fuel the markets.
In observing the recent past behavior in the silver market, it is quite evident that we're dealing with two different paradigms. One is the paper futures markets and the other is the actual physical market. The paper market is being controlled by the artificially synthetic short positions created by central bank selling since the highs were made near $50 dollars in April of 2011. This speculative massive short position has exceeded supply by a factor of 10.
This is a highly risky strategy as the logic defies the ability of free market forces of supply and demand to make the economic adjustment that needs to take place in order for prices to find a more balanced and fair market value.
In other words, it is highly unlikely that this record amount of silver will ever be delivered. As the supply pressure persists due to an increase in the physical demand, it raises the probability and risks that this short position can be forced out of the markets with monumental losses and be forced to "short squeeze" their short positions out of the paper markets and as a result forfeit and default on their obligations.
This is a very real possibility as a tremendous amount of the metal itself is being drained as reported in the Comex warehouse inventories and the precious metals derivative instruments like GLD and the SLV Exchange Traded Funds (ETFs).
Historically, the market always comes to the realization that the basic foundation of supply and demand is the primordial basis and foundation of any free real market economic process.
For the investors that shy away from the risks offered in the futures (paper) markets but are interested in participating in the silver market, we suggest you take a look at the AGQ, Exchange Traded Fund.
The investment seeks to provide daily investment results (before fees and expenses) that correspond to twice (200%) the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. The fund invests in any one of or combinations of the financial instruments (swap agreement, futures contracts, forward contracts, option contracts) with respect to the applicable fund as benchmark to the extent determined appropriate by the Sponsor.
Let's examine the technical picture for AGQ and see what trading opportunities we can identify for the first week of trading in 2014.
AGQ ProShares Ultra Silver Trust.
The AGQ contract closed at 15.76 . The market closing below the 9 MA (16.79) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.
With the market closing above the VC Weekly Price Momentum Indicator of 15.69, it confirms that the price momentum is bullish. A close below it would negate the bullish signal to neutral.
Cover short on corrections at the 15.04 to 14.31 levels and go long on a weekly reversal stop. If long, use the 14.31 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 16.41 to 17.07 to levels during the week.
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
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 AGOL, AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DZZ, GLD, GLDI, GLL, IAU, PHYS, SGOL, SIVR, SLV, SLVO, TBAR, UBG, UGL, UGLD, USLV, USV, ZSL 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.