-- Posted 5 December, 2006 | |

          On September 17, I posted an article describing why I thought we were near an excellent buying point in silver. Hopefully, you bought during the several weeks of lower silver prices that followed and are up $3 an ounce since purchasing. If you are investing for the long term, you should not worry too much about the daily fluctuations of the silver price. It is more volatile than gold, but that volatility can also produce profits if you trade some of your position. I typically only trade no more than 15-20% of my total position when silver seems like it is overbought or oversold.

For a number of reasons, I have started taking profits on this latest silver rally and I think it could top out soon, and then correct to give us another buying opportunity. First, silver typically sees a correction of some kind every December. Not coincidentally, the RSI indicator is now above 70 (see chart below). When it exceeds this level, a correction tends to follow within 1 to 3 weeks. I expect silver will drop $1.50 to $2.00 this time and will find support around an RSI of 50. This will be a great opportunity to buy more in anticipation of a rally that will exceed the $15 highs of this past spring.

          Second, gold has not rallied as strongly as I would have expected given the recent fall in the US dollar. The dollar index fell about 3 points in the last two weeks and gold responded with about a $30 gain. While many analysts are proclaiming the imminent death of the dollar, it is still the reserve currency of the world and it is therefore in the best interest of all countries holding the dollar that this currency’s the dollar’s decline be gradual and “measured” as the economists like to say. There are still inflation pressures that the Fed is fighting which could force them to raise interest rates again in January even though the economy is slowing. The FOMC meets next week and the currency and gold markets will be looking at their meeting minutes carefully to anticipate the Fed’s next move with interest rates.

The dollar is currently oversold and has found support at the low 82 level. I expect that the dollar may reverse in the short term, and rally up to the 85 area where it will find resistance. This will trigger a sell off in gold, and silver will fall sharply since it has risen strongly with few setbacks since the beginning of October. Longer term, the dollar will eventually fall below the 80 mark that it hit at the end of 2005. When it does, the flight out of the dollar will begin again in earnest and gold and silver will pick up increased investment interest. See the chart below of the past three years of the dollar index. I am not a dollar bull, but it trades in up and down cycles that are worth noting.

          I revised the trend chart of silver over the past year. Silver appears to be breaking out of the upper boundary of a new channel. However, the top of that channel is only marked by one high point at $13 so this channel is not that well defined. Still, it is possible that we could see a short-term spike towards $15 or beyond. I think gold would need to close in the spot market over $650 for several trading days to give this rally more life. When the correction starts it usually wipes out profits quickly, so I prefer to sell into fading strength rather than wait for a confirmed drop.

Summary

Calling tops in bull market rallies is difficult, but I do think it is very likely that we’ll see the short term top this week or next in silver and gold, and another buying opportunity within one to two weeks of the start of the correction. This rally doesn’t feel like it has the same strength that it did in March when investors were hyped about the launch of the silver ETF. If spot silver closes above $14.30 or spot gold above $650 for two days, then the rally will continue another week or two longer. Otherwise, I think we are close to the top. When it corrects, plan to buy again around an RSI of 50, which may correspond to at price in the low to mid $12 range. As always, I don’t recommend trying to sell at the exact top or buy at the exact bottom. I usually dollar cost average my sales just like my purchases. Silver may not close the year above $15, but it should surpass that level in the first quarter of 2007. Best wishes on your investing and future.

God Bless,

Timothy Silvers

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.