Since May, I have been suggesting that silver is an excellent short trade. That perspective has since proven quite prescient. Now, I am going to change my perspective, at least for the short term. Right now, I feel silver is a strong buy, and I will explain why.
Sentiment
At the time I wrote my first precious metals article on SA in August, suggesting a further correction will be seen in silver, almost every other article that came out at that time was suggesting a buy in silver for a run to over $50, some even claiming it would exceed $100 shortly.
In fact, the amount of vociferously bullish comments that I received for my article, many even suggesting that I “know nothing about silver and precious metals” because I “dared” to suggest a top, only solidified my perspective that we were very close to a local top, with further downside expected. While silver did exceed my upside call of $43.90 by $0.56 several days later, it did so on very low volume and in a corrective manner. It then proceeded to decline, which culminated in a significant drop in the price of the metal by over 40%.
At this time, I am seeing authors and commenters even suggesting that investors abandon silver for other investment vehicles, and even some suggesting that silver has much further to decline. This shockingly significant change in perspective is most probably signaling a local bottom.
US Dollar
The US Dollar has had a significant rally from its multi-year low, and has now broken out of its downtrend. However, as with any rally, it is time for a pullback in the USD. This should relieve some of the deflationary pressure on the metals, allowing it to rise while the dollar pulls back before a much stronger rally that I expect to begin towards the end of this year, into 2012.
Cyclical Turning Point
I believe that silver is entering a cyclical turning point in which silver should begin a significant, but final, rally. The next few months are traditionally quite bullish for the metals.
Update of Prior Analysis – Forecast For Silver
In August 2011, I suggested that silver was about to experience another dramatic decline. I provided downside targets of $26.50-$26.80 region, and, if broken, suggested that silver can drop to the $22.50 region, which should provide the needed support. In fact, in my opinion, silver has either already completed or about to complete its corrective decline and should maintain support above the $26 level, as expected. However, there could still be some weakness in the price over the coming days, but scaling into silver from now will probably prove to be a smart move.
The two levels we are focused upon is a break to the upside through the $33.15 and $35.68 levels in the futures, which will signal the start of the larger rally taking hold. Ideally, I would want to see the $29.90 level hold support, and, in the worst case scenario, the $26 region.
As I also explained in my last article, if we found support at this level, then you would want to consider buying silver for a run to at least the $50 level, and a potential double top. Although we can exceed this target, as we move into this potentially parabolic rally, we will be able to better pin down the target in order to exit our trade when we hit what I expect to be a multi-year top. The ensuing correction may make the current correction look like child’s play.
Disclosure: I am long SLV.
