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The Silver Bullet

By: Peter Degraaf

-- Posted 6 March, 2006 | |

The recent price action in silver bullion and silver mining stocks has been breathtaking, and for those of us who are solidly invested – quite profitable.


I well remember from my trading days in the late 1970’s, that whenever the price of silver moved up faster than gold, in percentage terms, both metals advanced, and as long as that interim trend continued, the rally was safe.


            Whenever the metals fell, it was usually always silver that fell the fastest of the two.

            Thusfar in the ongoing precious metals bull-market the same relationship is holding true.


            Featured is the chart that measures the strength of silver compared to the strength in gold.  This is a very useful chart, and should be a part of every traders toolbox.  It can be obtained by visiting and typing   $SILVER:$GOLD in the top right corner.   A chart will pop up with  options to increase the time frame and the chart characteristics.

I’m happy to report that this chart is very bullish at this particular time.  It features a 2 year long ARAT {Advancing Right Angled Triangle}, with room to move up (red arrow), till we meet up with the resistance line.  The 50 Day Moving Average (DMA), has moved above the 200DMA, for a positive alignment.


            The characteristic of an ARAT is that it attracts more and more buyers near the sloping uptrend, and most usually, it breaks out above the resistance line before it reaches the apex, as buyers overwhelm sellers.


            Erring on the side of caution, it behooves us to expect at least one more attempt by the sellers to push the index back to the rising support line, but if that happens, it may well be the last opportunity to get aboard, before the index breaks out above the resistance line.


            Generally, when an ARAT is resolved on the upside, by breaking out, the initial break is massive, followed by profit taking which may take the index back to the former resistance line which now becomes a support line.  The move up from there should be impressive, in view of the fact that the resistance line took the better part of two years to form.


            The Moving Average Convergence Divergence (MACD) at the bottom of the chart is showing a similar pattern to the index, and it also has room to move up.


            On the fundamental side, we observe increasing demand for both silver and gold, and a growing reluctance on the part of central banks to sell or lease gold.   There are two aspects to a successful trading strategy, and while this article highlights the technical side, it requires solid fundaments for balance.  I find the articles featured at the website to be of invaluable assistance.  These are written by people who have done their homework.   I then apply Technical Analysis (TA), to determine when to buy or when to sell, and this makes for a complete strategy.   


Featured next is the chart that compares the strength of gold to that of oil.

This chart is also very bullish for the metals.  Notice how for two years the price of oil moved up faster than the price of gold.  This changed in September.  The change in trend had been predicted by the RSI (top of chart), and the MACD (bottom of chart), as each of these indicators began to rise before the index itself turned up.  

The index has room to move up (red arrows).


            This means that in the event that oil moves up in price, gold will very likely move up faster.


On the fundamental side, we have growing demand for oil, and diminishing supplies.  According to Professor and Author Kenneth Deffeyes the world went through ‘Peak Oil’ on December 16, 2005.


The majority of the world’s oil supply is controlled by regimes that are not known for honest reporting, in fact quota’s within OPEC  are determined by stated reserves, and therefore highly suspect.


Canada is one of the few countries that is still able to increase it’s reserves, thanks to the Alberta Tar Sands, but it takes from 600 to 1,400 cubic feet of natural gas to produce one barrel of oil.


            Natural gas is becoming less plentiful, and a rise in price of natgas will increase the price of Canadian oil.


            Problems in Nigeria, Iraq, Iran, Venezuela, coupled with increasing demand from China and India, will likely tend to keep the price of oil fairly firm.  A steady or rising oil price will continue to support the metals price.


Caveat:  Nothing ever goes straight up, and corrections should be expected.  My personal course of action is to maintain a core position, and to add on near the support lines, then take partial profits near the resistance lines.



Please do your own diligence.  I am not responsible for your trading decisions.


Peter Degraaf is a successful online stock trader, who has been active in precious metals since 1962.  He sends out a weekly email to his many clients.  For a 60 day free trial contact him at: ITISWELL@COGECO.CA

-- Posted 6 March, 2006 | |

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