Gold and Silver: Is the Correction Over?

I was about a week too early in predicting the sell-off in precious metals, but it certainly materialized as we witnessed gold lose $100 (10%), and silver lose $3.50 (17%) in just 48 hours. It looked like a manufactured event by commercial traders (mostly big banks) to take advantage of technical investors, liquidate their short positions and go long again by buying the cheap gold that weak hands and technical traders were dumping into the market. Ted Butler wrote a good article about how this works, for anyone interested in reading more.

At the beginning of the year, I wrote an article with my 10 Predictions for 2008. So far, 8 of those 10 predictions have come true. One of the predictions was that corrections in the gold market would become increasingly violent, but also increasingly short in duration. After falling below their 50-day moving averages and looking like a huge drop was approaching, gold and silver both rebounded in the last two days, and recaptured about 30% of their devastating 2-day loss. The metals rebounded in the first day to rest on their respective support lines ($935 for gold and $18 for silver), and then continued decisively upward on Wednesday.

Technically speaking, any drop back below $935 and then below $900 could see the gold price freefall as low as $800. There is simply no support below $900. But as long as precious metals can hold the current support levels, it is safe to assume the correction is over. Fundamentals still point to much higher prices, and I believe we will see gold hit $1,000 again before it hits $900.

The next upleg should see silver outpace gold by a significant margin and see junior producers finally join in the fun. There have been a number of recent articles exposing how the silver market is experiencing a significant shortage and customers are being asked to wait for months in order to receive their silver due to dealers running out. Silver breaking the $20 level caught investors' attention, and if the supply/demand situation is truly as bad as it seems and even a small amount of investment dollars begin to flow into silver, we could see the price spike to $50 or more. Investors would be wise to take a position ahead of such developments, as silver anywhere under $20 will soon be a thing of the past.

Silver mining companies bring additional leverage to the equation and could go ballistic if silver breaks out as anticipated. There are obvious choices such as Coeur d’Alene Mines Corp. (CDE), Silver Wheaton (SLW), Pan American Silver (PAAS) or Silver Standard Resources Inc. (SSRI). But I believe the best returns will be offered from smaller producers or miners that are just beginning to bring their properties online and are only now starting to get attention from silver investors.

Yesterday, the general markets ended their two-day rally, with the S&P down (0.8%), and the Nasdaq off (0.7%). The financial and real estate sectors also ended their mini-rally, and crashed hard Wednesday helping our market shorts gain 6.8% and 5.3%, respectively. We might see more gains in the broader market, but I don’t anticipate it to last more than a week or two, and will be maintaining these short positions in the GSB portfolio in expectation of further downside.

Alternative energy stocks and solar stocks in particular have come to life in the past few days after three months of getting pounded. Some stocks have gained as much as 25% in a few days, after having lost 50% or more of their market cap since the start of the year. This sector is not for the faint of heart, but it is hard to deny the role that solar, wind and geothermal energy will have in our future.

While the stocks became clearly overheated and overvalued towards the end of 2007, yesterday’s levels are much more reasonable. I have increased my exposure to solar stocks in the past week, but have set tight stops and will keep a close eye on the effect the overall market downturn has on alternative energy shares.

Comments

[Greg Pinelli:]

You couldn't be more pretentious or incorrect...There is NOTHING obvious about CDE....it has struggled and will be a huge winner. You fail to mention a single better investment..which tells me your article is Mommy driven..all picture and no cattle.
Poorly written..poorly reasoned..third rate.

2008 Mar 27 08:55 PM

[sliman:]

Your 10 "predictions" are a joke. I predict the sun will rise every day for the rest of the year.

2008 Mar 28 09:13 AM

[fg144331:]

Well, I just read your 10 predictions and you seem to have been 'right on'. I do hope that bush is GONE and mccane isn't a factor in your prediction #8. We have so many "crazies" running the World, just hang on and hope for the best for all. I enjoy getting different opinions about investing, so keep up the good work.

2008 Mar 28 11:11 AM

[Toonytoon:]

wow... why all the hate ?

nicely written Jason 1

anyways, mind sharing some of the juniors you like in the silver and gold market?

2008 Mar 28 11:14 AM

[gebby:]

why buy solars with a tight stop. down here it is better buy and hold. set your stops after they rally 100%.

2008 Mar 28 03:03 PM

[whidbey:]

Not encouraging. Your views on PM are the sort of a morass we should have to read.

2008 Mar 28 05:37 PM

[Matt Callow_:]

Solar stocks are the next bubble to burst. IMHO.

2008 Mar 29 09:19 AM

[Jason Hamlin:]

Yeah, there are always brave posters that attack and criticize everyone else's views without offering any substantive argument and without writing their own articles. Some of these same people have left negative comments on a number of articles. I think they get some sense of superiority out of attacking others' views anonymously. Pretty weak.

But to respond... yes CDE is an obvious choice for a silver miner moron. They are the world's largest primary silver producer. What isn't obvious about that? I was including some silver stocks to give new investors a place to start researching.

And the 10 predictions were running contrary to what most in the investment world believed at the time they were released. So I appreciate your prediction that the sun will rise, but that really isn't comparable.

I suggest setting tight stops on solar because I am not convinced that they have bottomed or will be able to rally in the face of a recession. So while the solar sector is explosive and looks to have bottomed, setting stops will protect from a deeper plunge in prices. Matt Callow - I think their bubble has already burst, as many companies have lost over 50% of their market cap in the past 3 months. Solar stocks could always continue lower, but I think the "bursting" has already happened to a large degree.

Peace & prosperity to everyone during these increasingly chaotic times.

2008 Mar 29 05:11 PM

[poet1:]

Jason,
Thanks for the article. What about an etf like GLD or SLV, as opposed to miners (paas) or middlemen (slw). Which would fare best if silver breaks out? I am long GG & SLW & INIVX.
Charlo

2008 Apr 01 02:56 AM

[spidermike:]

The price of silver will leverage tremendous gains in Coeur d'Alene particularly if they complete Mexican mine by early 2009.

2008 Apr 01 11:55 AM

[Jason Hamlin:]

Poet1,

The miners typically offer leverage to any increase the metal realizes. This hasn't happened in the past few years, but historically speaking, returns are 2-4X greater if you own the miners vs. owning the metal.

You can get additional leverage by picking up warrants on SLW (TSX:SLW.WT.A)

Subscribe to my free email alerts at goldstockbull.com to get periodic updates.

2008 Apr 06 01:00 AM

[wishin':]

I believe you are right on in your analysis of silver. I am having some fun with a stock called ECU, a canadian company. What is your take on this company? They say their reserves are off the chart and the people I know believe them. Your comments would be appreciated.

2008 Apr 29 07:59 PM