Silver – Time to buy

Puru Saxena
Posted May 14, 2011

Only two weeks ago, the price of silver was rapidly appreciating in a parabolic advance. Back then, sentiment towards the white metal was extremely bullish and its price was approximately 78% above its 200-day moving average. Furthermore, on the 25th of April, silver registered a key reversal whereby its price tested the all-time high recorded in 1980 but failed to hold on to its intra-day gains.

You will recall that after observing all of the above conditions, we sent out an alert advising investors and speculators to take some money off the table. As it turns out, our caution was warranted and what has recently transpired can only be described as a rout in the silver market.

It is notable that although we were looking for a big medium-term correction in silver, even we were taken aback by the force of the decline. It is astounding that within two weeks, the price of silver fell by approximately 35% and today, the white metal is trading at just US$34 per ounce. It goes without saying that the recent price action in silver is yet another reminder that commodities are extremely volatile and parabolic moves always end in tears.

Now, we are aware that many manipulation theories are currently doing the rounds whereby the affected parties are claiming that silver’s plunge was due to an orchestrated takedown by the banks. Obviously, there is no way to prove this but it pays to remember that when any asset appreciates by 190% in 8 months, most of the buyers have already bought into the bullish thesis. Therefore, after the buying has exhausted itself, profit taking and short-selling bring about the reversal and the price retraces a large portion of the gains. This is how the world’s financial markets have operated since the beginning of time and ‘this time is different’ are the four most expensive words in an investor’s dictionary.

Turning to the present situation, the price of silver is currently trading around US$34 per ounce. Moreover, it is noteworthy that on two occasions, the price of the white metal briefly dipped below US$34 per ounce, however on both days, it closed above that level. This price action leads us to believe that silver is finding some support in the US$32-34 per ounce area and it is conceivable that most of the selling is now behind us.

In terms of the technicals, silver is currently trading only 17% above its 200-day moving average and its daily chart reveals a double bottom formation. Moreover, investor sentiment towards the white metal has changed dramatically and euphoria has been wrung out of the market. Thus, bearing in mind the possibility of a base formation and the negative investor sentiment, this is the time to start accumulating positions in silver.

Look. We do not possess a crystal ball and have no divine powers to accurately predict the future. However, we believe that the risk/reward for silver is now favourable and barring a deflationary meltdown, the downside is limited.

Our analysis suggests that under the worst case scenario, the price of silver could decline to US$30 per ounce but even that level is less than 15% below the current price. So, this is the time to re-allocate capital to the silver market but investors should bear in mind the possibility that silver will not climb to a record high anytime soon. Instead, the probability favours a lengthy base formation which will then act as a launch pad for silver’s next rally.

Finally, it is our contention that during the next rally in precious metals, silver will not be the leader. After all, the recent plunge has devastated investor sentiment and it is unlikely that the party goers will show up at the same ball again.

If our assessment is correct, the precious metals sector will experience a rotation, whereby investors and speculators will now turn to gold. Accordingly, we believe that during the next big advance, the yellow metal will provide leadership and appreciate more than silver.

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Puru Saxena
Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

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