As far as we can ascertain the demand for physical silver is alive and well with reports of people queuing to buy it while a number of suppliers, including the mints have been selling all that they could produce of the popular coins and bars. And yet the price of silver falls in the paper market which highlights the disparity between the physical and paper markets.
The Silver Chart:
The above chart of silver prices shows that it has been two years since silver flirted with the fifty dollar price level, since then it has been a bumpy road on a downward slide. The 200dma and the 50dma have weaved their way lower with a cross of death followed by a golden cross followed by another cross of death. The latest crossover took place at $31.00 and silver has since fallen to today's level of $22.22/oz.
Although I am of the opinion that we are indeed still in a bull market for silver, the current trend is down and so we have a situation where a short term down trend exists within a long term uptrend.
I'm reluctant to increase my exposure to silver mining companies at the moment as I'm not convinced that we have been through a 'total' capitulation. This is a capitulation of sorts but there could be more downside before we see any upside movement. The next support level for silver is around the $18.00/oz level and if this current trend continues we could see this level tested before we see a resumption of the rally in silver prices. If silver does drop another four bucks or so the silver mining stocks will take a serious hammering. However, should silver be able to hold and consolidate at those levels then we should be looking at the buying opportunity of a lifetime.
When you are assessing the silver mining stocks that you favor take some time to examine the cost per ounce of production. Put in context this sector was unloved for around 25 years and as such did not attract the best young talent into its industry. This has been followed by ten years of "fast track" projects whereby the top dollar has to be paid in order to entice the labor that these projects require. As we all know this increase in demand has pushed costs up which along with the high cost of energy has had a serious effect on the cash costs for producers. So you are looking for a high quality producer, with relatively low cash costs, sufficient funds to continue for a year or two without recourse to the banks and a management team with a proven track record in this business.
The northern hemisphere summer heralds in a lackluster period for the precious metals such as silver and gold, so from a seasonality standpoint we are not expecting to witness any form of substantial rise in prices.
We are looking to go long in the near future, but now isn't the time as we need to see this trending down phase come to a halt and silver prices build a base from which an ascent can begin.
As bulls we can sit on our hands and do nothing other than be patient and wait for the risk/reward environment to become skewed in our favor or we could consider positioning ourselves on the "short" side of a few trades on the weaker mining stocks in this sector. A well thought out strategy involving the purchase of Put options can also deliver handsome rewards in this environment. This strategy has enabled us to generate cash at a time when the silver market has been under the weather.
The important point here is that we do not become too blinkered or close our minds to alternative strategies just because gold and silver prices have increased year on year for a decade or so. Be mindful that when any commodity or stock has such a fabulous run there will come a time when it needs to take a breather. So you have a choice; suffer through this downturn or try and put it to work for you. Placing a down bet does not mean that you are a bear on precious metals; it means that you are flexible enough to trade an opportunity when it presents itself.
As always, find the time and do your own due diligence as it's your hard earned cash that is going on the line, it will be well worth the effort in what is one of the most exciting, even though very volatile, sectors of the market.
Disclaimer: We make no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is not a guide nor guarantee of future success.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.