Is Silver Going To Crash Further?

Includes: SLV
by: Avi Gilburt

Over the last week I have been inundated with emails and messages from investors "freaking out" about the recent drop in silver. While the drop occurred from the 28 region rather than the 29 region, it otherwise has acted as we had expected, so I really wish people would calm down. Getting emotional over any investment is not placing you in a mindset ideal to make an appropriate investment decision.

Now, take a step back, and think about why you bought silver in the first place. And, there are usually two different answers to this query. Some people look at silver as insurance against the collapse of our financial system. These are people who continually stock up on both metals in physical form and intend on holding for generations.

But note, silver and gold serve different purposes under this perspective, and I am asked about this all the time. For the many that ask me about how to invest in silver, I personally do not like silver bars. Rather, I view gold as your store of value under this perspective, whereas silver's utility under the financial melt-down scenario is as a medium of exchange. To this end, I usually suggest buying silver in coin form, and I suggest having a healthy amount of junk silver for this purpose.

Then there are those of us who like to trade silver within the financial markets. These are traders who use the ETFs, or even options on the ETFs, to make money on the movements on silver. As we all know, silver is a very volatile metal, and being on the right side of the silver trade is quite exhilarating. In fact, the best trades of my career were silver trades. But, this takes a lot of work, a solid risk management plan to which you must always adhere, and an appropriate methodology in which you can have confidence in determining silver's movements.

Since I began writing for Seeking Alpha almost two years ago, where my first market timing article was calling the top in gold, I have made it quite clear that I do not proscribe to only one of the perspectives above. Rather, I am a big believer that everyone should own physical metals for insurance purposes, and every larger drop to a support region is a very long term buying opportunity.

But, at the same time, you know that I like to trade silver as well, and I use Elliott Wave analysis as my preferred methodology in so doing. Over the years, many of you have gone so far as ridiculing this methodology. Many simply just do not understand it. But, what it basically does is it tracks the public's sentiment as it relates to the metal. It also provides us with if-then perspectives, using Fibonacci mathematics, to determine what silver will likely do, but it does not provide us with absolutes. For those that can understand this perspective, such analysis becomes invaluable when trading silver, and has made them quite a nice bundle based upon the emails I have received.

Bringing me back to the initial purpose of this article, I am suggesting to everyone to rein in the emotion and consider why you invest in silver. For those that buy silver for insurance purposes, you are being provided with another opportunity to buy another tranche for your investment portfolio within the low 20s, a level which I predicted to see many moons ago.

For those that trade silver, this is clearly a gut check time. For quite some time, I have been trying to emotionally prepare you for the possibility that we are going to find ourselves in this region. Even though many did not really believe it, we are here. But, please do not panic. In order to make the appropriate trade at this time, you need to be thinking about this as a trade from a non-emotional perspective. A good trader once taught me that you have to learn to trade the chart, and not the money. So, let's see what we need to know to trade the chart.

First, silver provided us with extreme extensions that took us below our ideal support level this past week, but we did bottom at the lower end of our long time target region. But, the market is clearly telling us that even though it has since bounced, this bounce is clearly only a corrective bounce. It also tells me to look towards the next larger degree Fibonacci support level, which is the 19.81-20.90 region in the silver futures.

I do believe silver will likely see at least one more decline which can target that region next. The reaction we see from that region will be quite important for the long term silver trade which can still take us over $60 in a relatively short period of time. But, I must warn you that I even have to start considering that the longer term pattern in silver may break down, which will likely be confirmed for me if silver does break down below the 18 region in the futures. Clearly, this is not my expectation at this time, but when we come this close, we need to consider this possibility. So, for traders, we find ourselves approaching a relatively low risk buying region, with a clearly defined exit region.

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.

Additional disclosure: I am long using LEAPS, with intermediate term hedges.