Silver appears to be setting itself up for another sell off in price. From a fundamental standpoint, the problems in Europe are spinning out of control, creating a safe haven for investors in U.S. Treasuries. Consequently, the dollar has been in a rally and the Euro is tanking. The fact that the Euro suffered one of its biggest one-day falls against the dollar this year on Wednesday, while Eurozone government debt sold off across the board is another warning sign that the problems across the Atlantic just keep getting worse and worse.
With headlines like, “Euro on ‘Death Watch’ After Investors Spurn German Bonds” the U.S. dollar is in a rally. Because precious metals like gold and silver are generally used to hedge against weakness in the dollar, they have been losing their shine.
From a technical perspective, it appears that silver is setting up to drop to its next level of support in the $20 - $25 dollar range which can be seen with a long term regression line of price on the chart below. (Click on the chart to see more detail). This chart uses weekly data in order to gain a better perspective of long term support levels.
The next chart shows daily bars and the divergence between the value of the 5 period RSI and the support line of price over the past couple of months. It’s clear from the chart that a wide divergence in the direction of the two has taken place this past month. (Click on the chart to see more detail). Click to enlarge
Recommendation: Both the fundamental and technical reasons to own silver and gold have changed dramatically during the past month. It’s time to go short and prepare for the next leg down in price. Sell silver - SLV and gold - GLD. Buy DGZ, ZSL and or GLL. DGZ is an inverse or short gold fund. ZSL and GLL are Ultra Silver and gold short funds.
For more conservative investors, buy the Exchange Traded Funds SHV or SHY. SHV invests in U.S. Treasuries with a duration of 1 to 12 months, while SHY invests in U.S. Treasuries with a duration of 1 to 3 years.