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The patterns
forming in gold and silver are remarkably similar, and much of what
has been written in the parallel Gold Market update applies equally
to silver, so it will not be repeated here. The big question is
"has silver finally bottomed?" – that is the question
that we are going to attempt to answer in this update.
The chief difference between gold and silver is that silver is
much more volatile than gold and thus serves as a vehicle to obtain
more leverage on moves in the Precious Metals sector, in either
direction. This is demonstrated by the silver to gold ratio chart,
which we will look at shortly, which shows that when the sector
is depressed, silver falls more in percentage terms than gold does.
On its 2-year chart we can see that while silver aborted its potential
Head-and-Shoulders bottom pattern, in the same way that gold aborted
its Head-and-Shoulders continuation pattern, like gold it may be
forming some other reversal pattern, such as a Triple Bottom. In
any event its arrival at key support at its September and December
lows has resulted in a bounce, as we expected it would, and the
crucial question as with gold is whether this bounce is just that,
a bounce and nothing more, or whether it marks an important low
before a major uptrend begins.
In attempting to answer this question many of the arguments set
out in the parallel Gold Market update in relation to gold apply
equally to silver, but one important difference should be highlighted.
While gold's latest COT chart certainly looks bullish, silver's
is much more strongly so, with the Commercial short positions having
dropped to a very low level – about the same level as that
which preceded the big rally in silver in January and February.
Just by itself this strongly implies that silver has just hit an
important low and that a new uptrend is dead ahead.
The 2-year silver to gold ratio chart is very interesting. While
silver bugs were walking tall back in April 2011, with many being
egged on by former vacuum cleaner salesmen etc, they are now almost
ashamed to admit to owning the metal. This is certainly a good sign
and this ratio chart shows that we are definitely at a good point
for silver to start outperforming gold, as it is on strong relative
support which has produced a turnaround twice over the past year,
and if it starts outperforming gold it means that a PM sector uptrend
will be under way.
Everything now depends on market perceptions with regard to the
massive wave of QE that is believed to be slated to stave off total
chaos in Europe and buy some more time there. If this is not forthcoming
and the forces of deflation precipitate a market crash, then of
course silver could breach nearby support which would lead to another
sharp drop, but if it is, then silver is in position to start a
major upleg from here, which given the magnitude of the impending
QE, could be truly massive and part of a broad based advance in
the commodity sector as the QE, and the massive stimulus already
applied, works its way through the system resulting in severe inflation
or even hyperinflation.
Regardless of whether or not we have just made an important bottom
– and the latest COTs strongly suggest that we have – one thing
is as clear as crystal; we have an excellent risk/reward ratio for
those going long silver here as shown on its 2-year chart above,
as buyers can place a close stop just below the support, and it
will be even better if the price reacts back towards last week's
low again in the near future. If the deflationary forces gain the
ascendancy short-term then you will be taken out for a relatively
minor loss, but if the expected QE is unveiled to save the day,
then we could see a truly massive advance from here.
May
23, 2012
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