-- Posted 11 January, 2007 | |
I think silver is at or near a low risk buy point right now. On December 4, I called for a top in silver and I expected to be buying again at a price in the low to mid $12 range. Silver has corrected since then by almost $2 and is hovering just above its 200 day moving average (DMA) of 12.21. I bought some silver in the drop last Friday and will likely complete my purchases this week or next. I am waiting to see if we get a sell off this Thursday or Friday that will take it below the 200 DMA. The rest of this article focuses on the logic and analysis I am using to determine when to buy.
For the past two years, the 200 DMA has provided relatively strong support for silver. Not coincidently, we have been in a silver bull market during much of that time. I assume the continuation of that bull market in today’s article and will discuss later some factors that could derail the silver train in the short and intermediate term. Long term I am super bullish on silver, as I always have been. If you aren’t trading silver or using leverage then stop now and buy silver while it is still cheap. A $.50-$.75 an ounce lower entry price won’t make any significant difference 5 years from now.
Today I decided to use the candlestick graph of the silver exchange traded fund SLV instead of the $SILVER continuous contract because the SLV graph has recently been tracking closer to the spot price of silver, which is the price I refer to in my analysis. Silver has dropped below the 200 DMA three times in the past 4 days but has managed to close above it every time. I somewhat expected the sell off to resume today in the face of a rising dollar and lower crude prices, but buyers stepped in around 10:30am and brought silver and gold back to life. If we can stay above the 200 DMA this week then it is likely the correction is done for now and you may consider being fully invested. However, the commercial futures traders are still holding short about 50,000 futures contracts (15,000 more than in October), so there is room for the price to get pushed down a bit more. Gold is about $10 below its 200 DMA but has been showing strength and holding above $605. Gold seems pretty attractive at these levels but I focus on silver because it typically outperforms gold in a bull market and the volatility is more conducive to trading.
The recent drop in silver and gold since early December is a result of a weakening commodities outlook in the face of a potential global slowdown, a rising dollar, and the associated liquidation of commercial futures contracts. As I mentioned in my last article, the dollar is still the reserve currency of the world and it is therefore in the best interest of all countries holding the dollar that the currency’s decline be gradual and “measured” as the economists like to say. I expected the USD index to rally up to the 85 area and it has done just that (See chart below). Some strong jobs numbers and a 1% “narrowing” of the trade deficit to $58.2 billion in November have helped boost the dollar.
Unlike some analysts, I don’t see this as the beginning of a dollar bull run. I expect the dollar index will soon hit resistance below 86 and start back down and then trade sideways to down this year. The Fed is unlikely to raise rates in 2007, only delay lowering them until a recession or verifiable slowdown kicks in. The government is still spending money like it grows on trees, so expect the budget deficit to persist despite the tough talking Democrats in Congress. The trade deficit alone should require at least another 30% drop in the dollar over time in order to work out the global trade imbalances. Reality will soon settle into the market and investors will realize that the dollar’s fundamentals aren’t very good and it will get sold. This should reignite the fuse on the precious metals bull.
Below is a trend chart of silver over the past 3 years. The silver bull really got started in September 2005 and has been stepping upward with higher lows since. If we start to correct more, I would expect the bottom to be no lower than $11.50, near this trend line. Closes below this would indicate that bearish factors are prevailing and that would probably mean a pause in silver’s upward price and more sideways price action. The main bearish factors would be surprising dollar strength and/or a continued degradation of the commodity sector. Silver is also an industrial metal, so a recession or global slowdown would reduce industrial demand for silver and other commodities and might lure investors into cash. A housing market slowdown/recession in the US is probable in the second half of the year or early 2008. Gold may hold up better than silver under these conditions. Keep this possibility in mind for your investing strategy this year.
I’m watching to see if silver will close below the 200 DMA of 12.21. If so, then I’m targeting $11.85 as a bottom. Closes much below $11.50 will mean that my analysis is wrong and that the commodity train is derailing in a hurry. In that case it would be best to sit on the sidelines instead of trading for a little while and see how it all sorts out. I consider a breach of $11.50 to be very unlikely at this time. In general for 2007, I am anticipating that silver and gold will be strong in the first part of the year, as in 2006. I think we’ll close the first quarter over $15 but beyond that I don’t have any specific price targets as there are a lot of variables that could affect the prices this year. Silver will likely trade sideways or bottom for the year in the summer. The last part of the year is too difficult for me to predict. We have to see if/when the housing related recession unfolds.
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 and my purchases. Please consider that whatever low we have hit or will hit in the next week or two will likely be the lowest price you will ever see again to buy silver. Don’t delay getting your portfolio established with a foundation of physical silver. It should be priced at multiples of the current price and $12 per ounce silver will seem very cheap in the future. Some readers have asked me to recommend how to buy silver. I have been extremely busy with limited free time but will try to consolidate my recommendations into an article in the near future. Best wishes on your investing and future.
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 11 January, 2007 | |