Discerning Silver's Path Forward

Includes: SLV
by: Goombarh

As I've observed previously, silver prices tend to lead the precious metals, and by inference, precious metals stocks. Therefore, to understand the near future of the precious metal prices and the prospects of precious metals miners, it may be instructive to examine the recent charts for silver to see if we may be able to discern a path forward for this year.

Silver Chart History

The chart for the silver price in the last twelve months follows:

(click on charts to enlarge)

Click to enlarge

From examination of the above chart, the first thing that jumps out is the (1) "Death Cross" exhibited by the silver price at the end of October in 2012. The Death Cross is a term for when the 50 day moving average (dma) crosses the 200 dma in a downward manner. This is an indicator that nearer term momentum is slowing down and looking backwards. It was a reflection of the sharp drop in gold prices after the peak in September 2012.

The second item to note in the chart is (2) the rounding top put in by the Percentage Price Oscillator (PPO). This is a relative momentum measurement similar to the MACD , and in the signal line crossing the average it indicates that the short term momentum is slacking off.

The third item of importance is (3) the silver prices coming up to the 200 dma and then rounding off to move lower. Again, this is an indication of the lack of buying power in the present markets to drive the price of silver higher.

All in all, the chart above is giving me the history of silver prices over the last year, and the indications are not startling. It is merely a repetition in chart form of what has happened in the markets. The story of silver for the recent past is that the momentum for silver prices has cooled off, and thereby, we see the dropping prices for silver as it presently moves lower.

Silver Fundamentals

In order to understand the way forward, one has to review the fundamental driving factors behind the chart prices and look for changes.

Firstly, precious metals are in a bull market, driven by the qualitative easing performed by the Central Bankers around the world. As this is perceived as money creation out of thin air, the markets see inflation coming for existing currencies, and look to protect their existing wealth in the precious metals. This has not changed and this is a long term driver.

Secondly, the central banks of the world have done an about face, and are now storing some of their countries' monetary reserves in the form of hard precious metals. This was a change and a primary driver for the rising prices for precious metals.

Thirdly, the middle and upper class masses of the world were stung by their losses in real estate and stock markets, and are using the precious metals as a store of wealth. This was a change and another primary driver for the rising prices of the precious metals.

The fundamentals of long term drivers for the precious metals appear intact.

Changes in the Markets

However, there are other directional changes afoot in the world real estate and stock markets. Real estate prices in America have bottomed in 2011, and there are indicators that the housing market is turning around for 2012. The U.S. stock market has been in an undeniable bull run since beginning of 2012, without any major pullbacks.

As for emerging markets, they have turned around as well. India is heralded as staging another bull market. Fellow Seeking Alpha contributor Cam Hui paints China as the world's savior, as both the Shanghai and Hong Kong indexes have broken out of their downtrends. It seems as if most of the world's stock markets are in the beginning throes of a new bull market. Therefore, the growing stock markets will present a new source of competition for investors' dollars and may bode ill for the rise of silver prices.

Pricing at the Periphery

There is a key point of understanding for the market setting of prices. It is not the fundamental demand and or perceived overall demand that moves the prices, but the pricing at the periphery of the market; that is the price for the next piece of that product that changes hand. This translates into the demand / purchase decisions being made by investors, all the time-- "Am I going to buy this or am I going to buy that?" As in any market, the silver prices will be driven by the spot supply and demand of the silver commodity-- and as mentioned previous, the demand will slacken.

Another idea is that the investors in the precious metals seem to be more sentiment based as opposed to logic based. That is, the investors will drive the prices up and prices down more than the actual valuation should reasonably represent. This is represented in the historical charts previously, in silver metal pricing's vigorous swings up and down. Though the demand for silver will drop, the volatility will remain, and there will be sharp swings both upwards and downwards.

Inflection Point for Silver Price

Now, let's go back to the charts to see what is actually happening with the silver price at present. The chart of the SLV silver ETF is used as the proxy for the silver price.

Click to enlarge

Again, the decline of the silver price from May of 2012 is readily apparent in the chart above. Also note the volumes of trading around that peak in May 2012 and the declining trading volumes from that time to the present. This declining volume is displaying a lack of interest by the markets.

Finally, the stock price is surrounded by Bollinger Bands, which wrap the price channel as a large sausage. These bands are standard deviations indicating the recent volatility of the prices. These bands are wide following a change and are narrow when the prices are resting. Note that the present bands around the silver price in February 2012 have constricted to a very narrow sausage. One interpretation of this is that a change may be soon forthcoming. As the prices are hitting the line drawn indicating the downward silver price trend, and not breaking through this line, the silver price is looking to breakdown further lower from here.

Outlook for the Silver Price

My conclusions about the outlook for the silver price are as follows. The fundamental drivers of the precious metals prices are intact and will underpin the silver price, keeping them at an elevated level over $20 USD per ounce. Beginnings of a change in the perceptions of the burgeoning growth in the stock markets of the world will draw monies into the stock markets and away from precious metals investing. This lowered demand from the masses for precious metals and silver will serve to depress the silver prices for the foreseeable future. Silver prices will swing back and forth without gains until the bull stock market has had its run. I have exited silver and silver related equities and I am seeking better returns from other market sectors at the present time.

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

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