-- Posted 10 February, 2006 | |
January has been an exciting month in the precious metals markets. Gold and silver have reached highs not seen since 1987. It’s been a over a month since my last article “No Correction Yet?” so I thought it was about time to put my silver market thoughts on paper again. The strength of this bull market the past few months has been quite impressive. For long-term investors of physical silver it shouldn’t matter if we have a correction in the near future or not, but if you are trading silver I still see signs that we should be cautious.
Each week as the COMEX Commitment of Traders reports are published, I update my charts and statistics related to the Commercial Traders’ (commercials) trading position. I posted a graph last month calculating that the commercials were losing about $1.6 Billion with their net short position, not counting any options or derivatives that they may hold to offset these loses. At the suggestion of one reader, I added the net ounces short to the graph, which should make the graph below easier to understand. I should also note that the commercials are always net short at some level, but for purposes of this graph, 10/14/03 (after a 9/03 correction) is assigned a $0 value. The “Sum of $ Short” line tracks the change in dollar value of the commercials’ short position ever since. This has proved to coincide very well with low and high point of the silver price, so I will continue to create the graph this way.
The commercials have reduced their net short position by almost 4000 contracts (20 Million ounces) since 1/3/06 and their outstanding loses now sit at $1.4 Billion. Looking at the graph, I found it very interesting that the commercials did something similar on 4/6/04 just before the major correction. Sum of $ Short was trending down, ounces short was trending down slightly and the silver price was increasing rapidly. I don’t know yet how powerful this graph is at predicting a potential correction in silver, but it will be interesting to see in the next few weeks. I won’t discuss again in this article all the details of why a correction is likely. However, the graph clearly indicates that every time in the past two years, when the commercials’ Sum of $ Short approaches zero, it has been an excellent, low risk entry point to add to your silver position.
Clearly, we are not at that point now. That doesn’t mean silver can’t go up from here. This bull market has a lot of strength! However, betting that “this time it’s different” while trading is I good way to see your portfolio lose a lot of money. If we get a correction, what is the potential downside? The graph below shows a couple of trend lines from the past two years based on the low points reached after the April and December 2004 corrections.
First, note that this is a clear bull market trend that has higher lows, even when higher highs were not reached. Also, every correction in the past two years has fallen between these two lines, with seven drops down to the top line and one to the bottom line. The trend line has no special power to predict, but we could correct into the $8 to $7 range and still be in line with a healthy bull market trend. In my opinion, being aggressively long right now is risky, given the history of corrections when the commercials are short at these high levels. I still think there is a high likelihood of a correction at least to the $8 level and potentially lower.
If silver closes above $10 for a few days, then this current bull move has more room to run and will likely challenge $10.50 to $11. There is support at $9.27 and strong support at $8.73. Firm drops below this lower support will likely see silver dropping into the potential correction zone shown in the graph above. Any drop into that zone will put us close to a great buying opportunity, perhaps the last buying opportunity ever again under $8. I will be carefully watching the commercials Sum of $ Short trend line to see if it again predicts a great low risk buying point for us.
Timothy Silvers is an independent analyst who has been following the silver market since the late 1990’s. Yes, Silvers is his real last name, so it only makes sense that he follows the silver market. If you are interested in more of his analysis, please visit his website at www.silverbrothers.com
Disclaimer: This article represents the opinions and personal views of Timothy Silvers and is not intended to be investment advice. If you choose to use this analysis for your personal trading, Timothy Silvers assumes no liability for the direct or indirect losses you may incur due to using this article to make your investment decisions. You are totally and completely responsible for your own investments. At any given time, Timothy Silvers or his friends and relatives may have positions in silver related investments that may or may not follow the recommendations contained in this article. The information in this article may not be completely correct and accurate. Even though Timothy Silvers has done his best to review the content and accuracy of this article, he is in no way liable or responsible for any mistakes or omissions.
-- Posted 10 February, 2006 | |