Why You Should Stay Away From Silver

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Includes: GLD, SLV, ZSL
by: BubbleBustInvesting

Remember last silver correction, three months ago?

In just a few days, the “poor man’s gold” lost close to 35 percent of its value—catching by surprise all those who believe that the heavy metal can defy gravity in the land of near free money.

Then, it recovered nicely. The iShares Silver Trust (SLV) and Proshares Ultrashort Silver (ZSL) has rallied near their old highs—fueling the enthusiasm of traders who believe that the correction in the price of the metal was just a pause in a secular rally.

Now, the metal is heading south, again, big time. Should investors buy, sell, or stay away?
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Conservative investors should stay away. Aggressive investors may want to sell the metal or even get short, for two reasons:

First, the metals chart broke key resistance level, $31.97 on the SLV.

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Second, weak fundamentals. As we wrote in a previous piece, silver is a good short—better than gold, because silver has appreciated much faster than gold (GLD) in the last two years, an anomaly, as gold has traditionally been appreciating faster than the silver. Also consider the fact that silver is more sensitive to a weakening economy that may be in the cards—and recent evidence confirms that such a weakening is already a reality.

Here, I want to add another factor that may cause a sharp correction to both silver and gold: the prospect of some sort of resolution on the European and US debt. In fact, Europeans seem to already have a plan dealing with the heavy debt burden of Greece to contain any contagion scenario, and Americans are moving forward with their own plan.

In the meantime, most of Europe is already under austerity measures, and chances are that America will embark on its own austerity plan. This means that, at least in the short and the medium term, economic growth will slow further in both Europe and the US. Add to that the sluggish Japanese economic growth and the de-acceleration of the Chinese economy (Chinese manufacturing has already been weakening), and you certainly have a bearish growth for silver—it may reach 20 before it reaches 50.

Disclosure: I am short SLV, GLD.