As we look back at silver prices for the week ending January 22, 2012, it appears to confirm the beginning of a potentially powerful upside bullish breakout.
In using the weekly point and figure silver chart above, we can clearly identify a double bottom formation on the weekly charts. This is a very bullish sign and confirmation the market has satisfied testing previous levels of support and is ready to challenge the upside Fibonacci retracement levels called resistance points or swing targets:
1. 32.8% = 31.70
2. 50% = 35.12
3. 62.8% = 38
4. 72% = 40.65
A weekly close above 40.65 sets the market up to challenge the 50 to 52 levels, a very realistic profit objective for the first few months of 2012.
Eurozone Crisis Continues
It appears inevitable the ECB has run out of options to stabilize and strengthen the financial core of the euro zone without continued and massive injections of capital to its weaker members.
Eurozone leaders' vows that Greece is a "one-off" case may be put to the test by Portugal, enveloped in a full-blown depression, and with more austerity measures still to come. Unlike Greece, Portugal does not face imminent default without another EU/IMF check, but bond yields are soaring on a huge stock of debt - at some point, the country needs either a debt haircut or more assistance from its neighbors.
The alternatives are very grim when you think of the global consequences it could have if the contagion spreads out of control for the western economies. Not to mention the impact on the already weak and fragile economies struggling to make it through this historical transformation of wealth taking place globally.
The silver market stands to be the beneficiary of the residual effect as a currency hedge from the weakness and re-structuring the fiat currencies are encountering. And until such time that we eliminate the "Risk Trade" status, prices will continue to keep the risk premium well in place.
The instrument of choice, although not generally accepted, seems to be one of a lower interest rate environment and loose monetary policy in order to continue to finance out of control debt levels that inevitably will weaken the underlying currency and could lead to a mass exodus of capital creating a liquidity crisis pressuring deeper on the world financial markets.
We don't have far to go back in history when we think of Mexico or Argentina in the 70's and 80's and let's not forget most recently the credit crunch that caused the financial meltdown in 2008.
Consequently, world debt to GDP ratios stand to expand its up-slope curvature. The fat tail cost of interest payments alone will have an upward spiral effect on its obligations and compounding balances as interest rates will begin to increase due to economic growth or any sign of inflationary pressures. This will continue to undermine the integrity and weaken the future prospects of a strong U.S. dollar as the world's reserve currency.
U.S. Recovery?
According to the recent economic indicators in the U.S., they seem to indicate the economy is showing some signs of recovery with the unemployment numbers coming down to 8.5% the lowest in 2.5 years. Not sure if this is politically motivated or are we actually are beginning to turn the tide.
Home sales rose nationally in December, marking the third consecutive month that the market has shown improvement. Previously owned homes were sold at a seasonally adjusted annual rate of 4.61 million units, up 5.0% from November and 3.6% from December a year prior, according to the National Assn. of Realtors.
The silver market seems to be tremendously undervalued to the present fundamentals and specially comparing it to the gold/silver ratio currently at 54.
The gold/silver ratio puts the value of silver at around $90 per oz. The current price of $32 is a historical buying opportunity! Those with an appetite for volatility and wise enough to embrace it, will be richly rewarded as market forces historically will always adjust such imbalances in a fast and furious manner usually over a short period of time.
Our price target for silver into the April to July 2012 time frame is in the 50's to 70's!
Strategy
For those who are not in the market, you may want to use present levels and buy some at current market prices. Place scale down orders to accumulate and buy below the market at previous levels of support and corrections to the 30 to 28 levels or lower. Major physical bullion buying has clearly identified these levels to be in very strong hands. Protect all paper or financed purchases on a weekly close below 28 per oz basis the London AM.
Disclosure: I am long PSLV, AGQ, AG.
Disclaimer: Precious metals products trading involves significant risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results.
