Silver is battling it out in the market trenches.
The fundamental thesis for owning silver continues: Hard asset protection against aggressive monetary stimulus, pricing instability and currency debasement. And as the situation continues to deteriorate in Europe, it is becoming increasingly likely that further aggressive monetary policy actions will be carried out in the coming months. Wednesday’s coordinated monetary policy effort signaled as much. And as the currency printing presses heat up, silver is likely to quickly follow.
Monetary policy has always been and will continue to be a key driver for silver. As the chart below demonstrates, when the Fed and other policy makers are engaged in aggressive monetary easing programs such as QE2, silver has soared along with it. So in monitoring silver’s progress in the coming days and weeks, any suggestions of further monetary support will likely provide an important catalyst to the upside.
Click to enlarge:
Technical analysis
Silver’s tension is building from a technical perspective. And once released, this tension may help in propelling silver meaningfully to the upside.
But in the meantime, it has some work to do. At present, silver as measured by the iShares Silver Trust (SLV), continues to slug it out with its 50-day moving average (blue line on chart). After first battling its way back to this resistance level in early November, silver has been toe-to-toe with it almost continuously for the four weeks since. As the fight continues, the downward sloping 50-day moving average is descending toward $30, which is a level where silver enjoys strong support. As this 50-day moving average resistance and $30 price level support converge, something will have to give. And given the fundamental support for silver resulting from the likelihood of further ultra accommodative monetary policy, the probability is biased toward the upside for a breakout in silver.
Silver’s work is not over if it does manage to break out above its 50-day moving average resistance. The next levels to watch would be $32.50, which has been support on several occasions since silver pulled back from its peak in May 2011. The 200-day moving average (red line on chart), which currently stands at $35.89, would be the next hurdle to clear. And if silver manages to break back out above $37.50, it could be poised to make another run at its all-time highs.
As a final point, it is always important to note that silver is an extremely volatile investment and is not for the risk averse or faint of heart. Price movements of 5% or more are not uncommon on any given day. As a result, silver should represent a relatively small portion of any asset allocation and should be managed with care.
Disclosure: I am long SLV.
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
