Should You Buy Silver Now? - An Update

Includes: AGQ, SLV, ZSL
by: Avi Gilburt

The precious metals market is in quite a state of confusion based upon the significant number of articles that are now taking both sides in the silver trade at this time. This is a significant change from a month ago, when almost everyone was bullish on the metal. In fact, I was one of the very few analysts suggesting a short position in silver at the time.

Based upon my prior call for a short in silver, I am overwhelmed as of late with the questions I am receiving as to whether now is the time to go short or long in the silver market. My answer has been both. Let me explain.

A lot of people now point to the fact that the short positions in the silver market have been significantly tailored back by the commercial shorts. In fact, such silver short positions have been reduced by over one half of their former positions. They view this as being extremely bullish for the silver market. Others point to a significant shortage in the silver market.

While these analysts are probably correct for the intermediate term, I am not so confident that they are correct within the near term.

At this point in time, silver is being affected by the deflationary pressures that have been wreaking havoc with our equity markets, and the precious metals market is not impervious to such deflationary pressures.

For example, if we look at the last deflationary period that affected our markets in 2008, we will see that silver had a 60 percent correction. Moreover, the manner in which the price corrected was almost exactly the same type of price correction we have recently seen in the silver market. Therefore, the 2008 decline presents us with an almost perfect fractal picture of our current decline.

Therefore, if silver were to continue to play out in the same manner, it would mean that silver would have a mini-rally in the near term, only to be followed by one final decline to complete this correction.

Right now, silver is now in some form of consolidation after its large decline. This past week, we were watching closely if silver was giving us any indications of a bottom being in place. Specifically, we were looking for a rally from the bottom that we had identified over a month ago. However, based upon the manner in which silver pulled back after this week’s rally, I feel we have invalidated near term the bullish pattern. This means that we will most probably have one more decline in the silver market.

For the near term, it is very possible that silver can rally as high as the 34.70 or 36.50 level in the futures. Silver can then experience another sizable decline from one of these levels. The targets for the upcoming decline would be a potential double bottom around the 26.50 region, or even as low as the 22.50 level.

However, if silver breaks out over the 36.50 level with increasing volume, then the likelihood would increase that a trade-able bottom has been formed, and we can look for an entry for a trade to at least 50.00 in silver. However, I do not see this as a high likelihood at this time.

Alternatively, if silver breaks down below 22.50 in the futures, then the likelihood that silver has made a multi-year top has significantly increased. But, again, I do not see this as a high likelihood at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.