Will Silver Drop To $26?

Includes: AGQ, PHYS, SLV
by: Patrick MontesDeOca

I hope so! Last week's free fall in the silver market might have created the final window of opportunity to buy for a major buy-and-hold strategy for the long term.

The fact that the market broke the January 4 and December 20, 2012 lows does not constitute a major top in the market. It is simply a test to lower levels of support and a huge opportunity to accumulate at these levels for the long term.

The $28 to $28.50 price levels serve as a maximum extension for this correction using Gann Trend lines. It confirms a major level of support based on the downtrend line support extension starting from the November/December 2012 lows, and connecting the January 2013 low measures almost to the dime (a pre 1964 dime that is!).

The upper end of this trend channel is in the $31.50 area. A weekly close above $31.50 potentially could ignite massive short covering. If this upside breakout occurs, a sharp rally towards the $33.50 to $34 level could rapidly materialize.

Our 2013 proprietary cyclical wave analysis indicates a bottom occurring in the February 15 time frame with a strong rally into the time period around April 15, 2013. This would be the ideal synergy when prices should test the upper end of their projections. What will determine how fast and how high silver moves nobody knows, but current conditions are a perfect storm for this pattern to turn into a buying frenzy.

When you are looking at building wealth long-term by trading silver, opportunities like the one silver created this past week by testing the low $28 levels usually are short lived as smart investors come to terms with the fact that silver is really offering historic value at current prices.

Current silver bullion prices are a "bargain" at current levels said Karl Schott, a metals bullion specialist with the Equity Management Academy. "Current prices are out of line with the long-term fundamentals. It points to a continuation and failure of policies applied before the 2008 crash when the panic button was pushed and the Fed's magnificent economic solution called QE or Quantitative Easing was created." Essentially, QE is a policy of printing money controlled by the Fed to create unlimited amounts of fiat currency to support and stimulate economic growth. The problem is that it has some serious long-term consequences to the economy, the bond market, the US dollar's purchasing power and its role as the world's reserve currency.

Mr. Schott said, "When you are looking at a 5% or 10% objective to the downside and a 300% risk to the upside, you're risk reward ratio is historically upside down. The price of silver should be at $75 to $80 dollars per ounce not $28 or $26. The fact that it's trading here or a few dollars lower should turn out to be the best buy of your lifetime."

After a nearly 9% washout this month, the fundamental picture has only gotten stronger.

1. An industrious metal:

With a little less than half of total physical consumption stemming from industrial use, greater demand in that sector is seen as one of the most compelling reasons for higher silver prices. Industrial demand took a hit in 2011 and is also expected to be down in 2012 when that year's figures become available, but HSBC sees a significant recovery this year based on forecasts for growing industrial production in some of the key silver-consumer economies, such as China, Taiwan, Indonesia and South Korea. Silver is used for traditional applications such as mirrors, ball bearings and batteries, but also as catalytic converters in petroleum refining and in food preservation.

2. Strong investor demand based on monetary easing:

The push among several central banks worldwide to aggressively quantitatively ease their economies will be the single most important factor in pushing silver prices higher, Mr. James Steel, an analyst with HSBC said. In 2012, silver tended to rally on hopes for further stimulus measures, and the same scenario is likely to take center stage in 2013. Additionally, expect growth in silver exchange-traded funds "based on demand for hard assets amid a climate of ongoing monetary easing, economic uncertainty and likely US dollar weakness."

3. Jewelry:

In 2013, the appetite for silver jewelry should be supported by a growing global desire to buy luxury goods, although gold probably will benefit more from this trend than its silver cousin. Continued growth in China also bodes well for higher jewelry demand. Another important player, India, which is actually the world's largest importer of silver, is also lined up to give silver a bit of a boost. In 2012, Indian authorities hiked import tariffs on gold and silver, and the 2013 budget proposed additional tariffs on gold, but not on silver, HSBC's Steel pointed out. Read more about gold's $5,000 potential.

4. Coins and bar demand:

The market for silver coins and bars declined in 2012, but data has already shown a rebound in January and demand should stay robust for the rest of 2013. One thing to bear in mind, however, is the sensitivity to prices; HSBC expects a drop below $30 an ounce to stimulate bar and coin buying, while a spike above $40 likely will weaken that kind of silver demand.

5. And the joker - solar power:

Silver is an important component in several high-tech products, and solar power cells is one of them. HSBC said that initial forecasts for increased silver demand for solar panels proved a little over optimistic, but the sun-driven technology could still shine some light on silver prices. In the top two solar markets, the United States and China, policy support is increasing and a pick-up in solar power is expected in 2013 and 2014. Cheap US gas prices have weighed on the demand for solar power, but if gas prices rise, "the relative attractiveness of renewables such as solar power - and hence silver demand - will increase," Steel said.

In a recent interview with David Beling, CEO, Bullfrog Gold Corporation (OTCQB:BFGC), I asked what he thought of the precious metals markets. "Well, I think the current price of gold is actually low," Beling said. "I believe it should be over $2,000. When you look at the economic situation, both domestically and globally, there is a strong demand for gold in China. Throughout the whole world, a lot of people have demands for gold for all sorts of reasons, not just for speculation, and so I think the future for gold is very bright. Furthermore, I think the future for silver is even brighter. Silver has a lot of industrial demand. They are consuming more silver than they are producing, so I think between those two precious metals, I think we are well-positioned to take things forward, and under the current economic climate globally, both of these commodities have very bright futures."

Silver Technical Landscape

Let's take a look at the silver market's technical outlook for next week, and see what trading opportunities we can identify.

On February 22, 2013, the silver futures contract closed at 28.70. The market closing below the 9 MA is confirmation the trend momentum is bearish. A close above 29.82 would negate this signal neutral to bullish. With the market closing below the VC Weekly Price Momentum Indicator of 29.03, it confirms the price momentum is bearish. A close above 29.03 would negate this signal neutral to bullish. Look to take some profits, if long, as we reach the 29.82 and 30.93 levels during the week. Buy corrections at the 27.92 to 27.13 levels to cover shorts and go long on a weekly reversal stop. If long use the 27.13 level as a SCO/GTC (Stop Close Only and Good Till Cancelled order).


Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGQ, AG, SLV, GLD, GDX, PSLV, PHYS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts.