Are You A Scared Silver Investor?

by: Avi Gilburt

So, how many of you are surprised to see silver trading down below $26 in the futures? As you know, I, for one, am not. In fact, I have been looking for the $22-24 region in silver for a longer term buying opportunity for two years now since silver topped almost exactly 2 years ago.

But, I do owe you an apology at this time, as I did not prepare you for this decline to occur from only the 28 region, whereas I thought we would move to at least the 29 region before this last decline began. Sometimes, one can be looking for the perfect pattern set up, and in so doing, may miss a specific trade. So, while I was not able to set up a heavy short for this drop, the intermediate term hedges I have maintained have done quite nicely over the last week, while the long term OTM calls I have in SLV only experienced a relatively muted reaction to the downside.

At this time, many of those holding or analyzing silver are looking at this past week's drop as a technical break down in the metal. They see the 26 region in silver as their perceived support level for the last two years, and feel that now that this level is broken, silver has completely broken down.

Many who view the silver market from a fundamental perspective have also viewed the 26 region as important, since they believe that there is some tie in between cost of production relative to the silver price. Others are focusing on the Eurozone troubles or the issues in Asia as placing a floor on silver in the 26 region.

But, almost everyone - other than a metals perma-bear - seems surprised that silver has dropped this low, since they expected silver to rally with the economy due to their view of industrial production utility. In fact, with the market at an all-time high, and corporate profits as rich as they are, it is leaving those maintaining this perspective in quite a quandary.

Ultimately, almost all metals investors are nothing less than shocked to see the metals this low. The following quote I found on a blog seems to sum up the current sentiment rather well:

I am not a trader, more of a buy and hold....very bad strategy. My faith has been shaken, investing using fundamentals is over. I should have just taken my savings and gone to Vegas, at least I would have gotten free drinks. I have no idea what to do now.

But, as we know, the metals are moved by sentiment, and not fundamentals. For the last two years, I have felt that sentiment will not be ripe for a reversal until silver sees the lower to mid-$20 region. So, no news event or fundamental perspective that has been paraded for the last two years has had the expected positive effect upon silver until the negative sentiment trend has run its course, and becomes ripe for a change in direction.

As I wrote in a gold article I just submitted for publication on Seeking Alpha:

However, markets are not Newtonian in nature. Yet, the common perspective is that an asset will move in a straight line until something acts upon it to change its direction. Well, even the world of physics has moved away from this perspective, as Einstein wrote "during the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one."

Unfortunately, the investment community still believes in this concept, and is on the lookout for the latest "catalyst" that will cause the change in direction of gold. For the last two years, reason after reason has been paraded through the media, and none of it has mattered. Gold is still mired in its correction. So, if one were a logical, open-minded, intellectually honest thinker, one would have to recognize that it must be something other than a "reason" which will cause gold to rally.

So, rather than a "reason," our view is that gold will only rally when the sentiment is ripe for such a rally to take hold. This is why we track sentiment, and attempt to discern when sentiment has dropped to the point where a change of direction will ensue, with or without news or reasons.

So, silver is now moving into the region for which we have been waiting for two years. In my humble opinion, this is the region from which we can see a sentiment change. In fact, most of the individual investors I have spoken with who did not heed my warnings and bought silver in the 40's are now feeling sick to their stomach, and almost ready to throw in the towel. Note, I said "almost ready." This usually means that we are likely getting close to a bottom in sentiment, but it means that we have to get to the point where they are actually selling and do not want to hear the word "silver" ever again.

So, now that we are moving down into my long term target region for silver, I am looking at the 23 region as a point of confluence where we can see a bottom. So, as we move down into the long term target region, I would ideally like to see a very strong reaction to the upside when the bottom is hit. But, I cannot even assume a bottom is being made until I see at least a day long consolidation, followed by one last drop into a target region. So, stay tuned.

Disclosure: I am long SLV. 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.

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