Critical Price Juncture For Silver

First let me say the email response to my previous article “The Death of Gold?” was unanimous – everyone disagreed with me. Whether that is a contrarian sell signal I do not know. I hope to follow up that article but since I mainly write about silver, allow me a few comments on the silver situation.

The chart below sums it up I think – we are at a critical juncture for silver. Indeed the situation is so precarious that a resolution either way may already be underway by the time you read this article.

click to enlarge images

After dropping almost five dollars, silver has reached its 7 month trend line. What will happen now is important to the general silver situation for at least several months. If this line is decisively broken, I see no barrier to stopping silver heading down to its 200 day moving average and then some. If it rallies from here we could see another challenge at the old high of $21 set in March.

Now traders will repeat the maxim “The trend is your friend” and that certainly holds true until the trend is no longer your friend and breaks down into a lower longer term trendline. Note that this trendline has been in force since August 2007. But if we compare troughs to peaks, August 17^th to March 17^th is exactly 7 months. That compares to the 2004 run up which also lasted 7 months from its low to peak and we get 8 months for the 2006 run up. Going by precedence, this trend is long in the tooth.

As readers may recall, I exited my speculative positions in silver (mainly stocks) some weeks ago because one of our exit conditions was breached – a decisive break below the 50 day moving average. This also happened in 2004 and 2006 and those bulls did not recover for over a year.

So when silver rallied back up to its 50 day moving average, I sold. Readers are invited to check out my daily message board comments at this link for this weekend only. The password is “libertydollar”.

A further confirmation of silver weakness was its failure to exceed the 50% retracement level between the top of $21.34 and the then bottom of $16.30 which works out at $18.80. When silver dropped hugely near the end of the 2006 run up, not only did it contain itself above the 50 day moving average but immediately shot up to a new but brief high. We see no such action on this correction.

Nevertheless, there is always the possibility of a final push in silver prices to new highs. I do not discount that since in this game you have to weigh one probability against another and not sell all your holdings in one go since the market is not subject to our dogmatic dictats.

For example, Elliott Wave suggests a final wave 5 up for silver and hence analysts suggest this is only the preceding wave 4 correction. That may well be but the problem is that is a pretty big wave 4 correction in price and time. However, the wave 2 top of November 17^th at $16.20 has not been breached (barely) so theoretically another final move up cannot be discounted (though one suspects that heavy selling will be encountered at or near the high of $21).

But another important indicator for silver is gold. Since silver is essentially a derivative of gold when it comes to investment and speculation, where gold leads, silver follows but not vice versa. Silver cannot blast to new highs unless gold is doing the same. The chart below for gold suggests trouble for silver. The corresponding trend line for gold was actually breached on April 1^st at $920 and though gold has retested this line several times since then, it has failed to reclaim it. The reasoning is thus, if gold cannot reclaim its line, why should silver? The only hope one can see at this point is gold forming a double bottom at around $875 to form a platform for a new rally.

Clearly, traders will be taking their positions to the long or short side at this critical price line for silver. A significant price rise to either side will trigger a cascade of stop losses thus precipitating a price move in that direction. I don’t know what that price point will be because different traders have different stop points.

But to put things in perspective, I will be waiting to jump back on board the silver train at some point because this bull market in a wider sense is not over. People think that we are somewhere akin to 1978 or 1979 in this bull market. I think they are too pessimistic. I think it is more like the mid 1960s when silver began its inexorable rise from $1.29 to peak first in 1967 before resting and taking off again. That means another 15 years or more rising silver prices, but don’t forget the big corrections on the way!

Comments

[paultaut]

Finally...someone who understands that looking at a 3 month or 1 year chart can send one down the creek without a paddle. The charts tell the tale...the fundamentals will reveal themselves in due time.

Two different takes on Gold and Silver...Gold was not considered as anything but an inflation play in the 70's, it is now. Silver had film and Hunts then, now it is used in washing machines, food storage containers and will eventually be used in shipping perishable food.

Gold below 800 possible, sideways between 870-950 for 3 quarters probable...Silver between 15-16...buy.

[paultaut]

something else, trendlines are always broken and measured moves are not always realized...

A new chart pattern is not recognized until after it has begun to unfold.

[sorgmot]

You can get longer period graphs by going to our site and clicking on commodities, and click on Moore and then click on currencies and or commodities to investigate then back to 1976. We also like to go back to the 1930's when talking about commodities. The high for copper in 1932 was 8 cents a pound and the low was 4 cents a pound.

Now copper brings about $3.50 per pound. It is up almost 100 times from $0.04 or 50 times from the 1932 high of $0.08. Check up current prices related to 1932 prices and they will be up 50 to 100 times. Try candy bars, tools, houses, cars, ears of corn, and etc. The point is that price increases of 50 to 100 times are normal from the 1930's to 2008.

Another interesting comparison is the 1984 to 2002 time period during which commodities prices were level for gold, silver, copper, and other commodities.

Then, all at once all commodities all took off and ran up in almost equal proportional increases. Now one has to explain the long level price period and the subsequent sudden and uniform price gain ratios. Note that foreign (to USA) currencies have also had big run ups in the 2001 to 2008 period.

What happened to cause the run ups in 2001 to 2008?

We believe the 20 years of no commodity price increases relative to US dollars were caused by the competition of vendors to get their hands on $US balances which were appreciating in the form of bond prices and stock prices as USA interest rates fell from 1980 to 2000. To see this take a look by clicking in interest rates and then 5 year bond rates on our site.

All being said, we see no problem to commodities up 50 times from 1932 since everything else is up that much.

[SHARKTOOTH]

Today, all currencies are fiat--except silver and gold (as "currencies.). Since 1971 when the USA left the gold standard,all previous history is a poor "benchmark." As central banks world-wide "inflate" their currencies, silver and gold will become "the world's only Real Money." The value of real money should go to the moon.

[paultaut]

All of you simply amaze me...common sense, logic...I'm not used to this...

Jim Kingsdale has a web page...read his next article, visit, read legacy issues.

I think you will enjoy.