-- Posted 3 March, 2008 | | Discuss This Article - Comments:

Silver is rocketing, the silver shorts are sweating profusely and silver continues to outperform gold as the next big silver spike begins to take shape. The main question now is at what price will you exit your silver position? Readers have queried me for my view on the matter but plainly no one knows to the dollar at what price silver will form a major top in the months ahead. Some will get it right but there will be more luck than judgment about such price prophecies.

At times like these, the venerable record of $50 is looked upon as an obvious target, whilst others state the inflation adjusted measure of $135. Other investors perceive a paradigm shift and see higher prices even than these with $200 for some reason being mentioned more than once. Others seeing a hyperinflationary apocalypse suggest that the price of silver will become meaningless as the dollar vaporizes before our eyes. People like to work with solid numbers, especially ones that are rounded off to the nearest tens or hundreds.

In other words, you won’t get a consensus which is hardly surprising since the price in question lies in the future. Looking at the current price of $20, some may be getting a bit edgy as they look at their increasing profits and fear the top is in and $9 silver is the next objective decimating their new found wealth in the process. That is a natural fear, as natural as the greed that will make others hang on for ever greater prices. What is the happy rational medium between these two dominating emotions?

Since I like to be analytical, I hope one or two emotions are banished in the process; but being flesh and blood there is no guarantee there! The answer perhaps is not to get hung up on a fixed price. So, I prefer my indicators to say “when” rather than “how much” since price fixing can be a very angst ridden process if you have a lot of net worth riding on one asset.

Applying some kind of science to the matter can help detach us from the rollercoaster ride. For example, looking at extremes in price, the chart below maps out the 7 day percentage change in the silver price since 1963 just before it broke free of its government decreed price of about $1.28 per ounce. The price of silver is in green.

As you can see, the data swings between positive upward changes and negative downward changes as bulls and bears waxed and waned over the decades. We have had some whopping price fluctuations in that time especially in April 1987 when silver registered a 35% price jump in the space of seven days (why I am not sure). Behind that we have a series of huge jumps during the Buffett and Hunt spikes of up to 20% or more on the week.

Looking to the right hand side we see our current silver bull which turns out to be smaller in amplitude than our previous major bulls of 1972-1974 and 1977-1980 but comparable to the 1960s. In the light of those old bulls, we could say that we ain’t seen nothing yet. But if we zoom in on the last five years we get a clearer picture.

Here we see some interesting structures. During the 2004 run up when the silver bull was heating up, price increases did not exceed 9% per week though we had a series of increasingly higher lows when the price of silver “decelerated”. The 2006 bull was a different story; the weekly changes in the price of silver just kept getting bigger and bigger until we were getting weekly changes of up to 15%.

Now with our current bull leg we again see the higher highs of price changes with a current maximum of just over 10% set last week. So the message appears to be, 10% price changes each week are not unusual and indeed we should expect them to get bigger. In fact, going by past bulls it could possibly go as high as 20% on the week as the next major top in the generational silver bull market is achieved. Does that mean the bull is over when a seven day leap of 20+% is registered? Yes, quite possibly but the question is how many 20% leaps before it tops?

Further analysis of silver can be had by going to our silver blog at http://silveranalyst.blogspot.com where readers can obtain a free issue of The Silver Analyst and learn about subscription details. Comments and questions are also invited via email to silveranalysis@yahoo.co.uk.