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In the last couple of months, silver has been following a bubble pattern. It became extremely overbought with lots of bullishness, followed by a sharp decline. A bit before it started to decline, I explained why I thought silver would correct sharply. While I was a bit early, the silver correction finally began, when I thought that it would continue

Currently, I think silver has more room to decline. After an asset has become as overbought as silver did, we would expect the ensuing decline to bring prices far below the 200 day moving average. Silver is still about 10% above its 200 day moving average, so there is still room for it to decline, even if it were only to drop to its long term moving average


(Click to enlarge)

When the correction started, it was initially met with a lot of buy-the-dip bullishness. As the correction progressed, much of this bullishness quickly dissipated, although sentiment has not turned bearish. Large corrections generally and with negative sentiment, and right now, investors don't appear to be considering the possibility of a major decline

Another factor that I believe will hold down silver is the dollar. With the recent upward movement in the dollar, sentiment has only started to reverse from being extremely negative. I think that the dollar will likely continue its recent rise for at least a few months until sentiment becomes more positive

All together, there isn't as much downside for silver, but the outlook is by no means positive. With silver reverting from an overbought extreme, I think it is likely to at least move back to its 200 day moving average, a level around 10% lower than current prices. In addition, the dollar is more likely to rise than decline over the coming months. The best scenario I can imagine would be a sideways consolidation lasting several months

Disclosure: I am long GLTR, DBP.

Source: The Silver Correction Is Not Quite Over