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The virtues of gold (GLD) and silver
(SLV) are being addressed far and wide. My readers know the steady
drumbeat of praise that is reaching a crescendo for the white metal scares
the hell out of me. The driving forces behind silver’s price come
from investors, industrial demands and a global shortage. The world
simply is using more silver than the mines produce and new silver discoveries
are becoming difficult to find. These factors are becoming truisms for
public consumption. A parabolic rise has formed in silver as gold
advances on to our measured target of $1600. Please note that at these
times of extreme optimism volatile pullbacks become more
prevalent. Parabolic rises must be approached with caution.
Silver has rallied moving exponentially while gold is still moving linear.
 
This metric
of $1600 gold is important to us as it may signal a profit taking opportunity
for precious metals. Silver is in a roaring uptrend and has now
exceeded my late January target of $40. Gold Stock Trades believes that
high quality silver mining shares (SIL) will catch up to silver bullion even
as the silver bullion price may stall or consolidate. There will be
unavoidable pullbacks in silver’s secular uptrend and it would not be
wise initiating long positions at these extremely overbought levels.
Silver has a very high probability of shaking out investors as pullbacks
follow overbought conditions.
We have seen
investors scrambling to own silver and gold. What a difference a few
weeks make. In July of 2010 and January of 2011, we saw two major buying
opportunities for precious metals investors to position themselves at
discount prices. Now gold and silver prices are selling at a
premium. Silver is reaching extremely risky levels, yet miners are
still poised to breakout. Remember that I am recommending partial
profits if your winnings enable you to play with the house’s money and
you are still holding silver from our August Buy Signal. (Please click
the above links to review the momentous breakouts and key turning
points.) Other readers who have not been able to build a position can
wait for the inevitable pullback as additional buying opportunities.
From my experience it is prudent to wait for technical corrections before
getting aggressive with any commodity. We firmly believe that any
corrections on the way up will represent more reasonable entry points on this
uptrend. Always remember that parabolic rises can encounter severe
downturns particularly in silver which tends to be volatile.
Let’s wait for long term support and a shakeout to reinitiate our short
term positions.
One of the
reasons for such volatile action in the white metal is the large short
position in silver taken by major financial institutions such as JP Morgan
and HSBC, which are the subject of a new lawsuit that charges them with price
manipulation of the silver market. I believe these short sellers
have been wrong all the way up and Monday’s record volume may have been
capitulation by the silver shorts. I believe the accumulation of gold
and silver is a form of savings in sound money, but I am not adding to
positions when the precious metals market is reaching these extremely
overbought levels.
There are six
banks that now control the London based precious metals storage market.
Interpretation...there is not enough silver to cover the trades being made
which counts in part to silver’s record rise of 144% over the past 12
months and up 22% this past month alone. There is one additional consideration, global hedge funds own one half of one
percent (.005) of their overall portfolios in precious metals. Should
these funds increase their holdings to one percent (.01) this would result in
a large increase in demand.
I feel a
pullback may be in order as the recycling of scrap increases. I
don’t expect it to last very long. Above all do not even think
of shorting silver. I reiterate buy on dips as the price of silver is capable of doubling in
the next twenty four months. I do not expect the silver to gold ratio
to drop below 30:1 in the short term.
Is this a
secular long term top in gold and silver? I do not believe so. We
are witnessing a powerful up move in gold and especially silver, where a
healthy correction would be normal. There is a flight to quality away
from fiat currency namely U.S. dollars. If the dollar (UUP) continues
to lose value, your holdings of precious metals and mining stocks (GDX) will
prove to be a prudent decision.
It must be
noted that Evo Morales from Bolivia threw a shock
into major silver miners especially Pan American Silver (PAAS) and Coeur
D’Alene Mines (CDE) by saying he would use force majeure to take over
the mining industry. This caused an immediate drop in the prices of
these stocks. On Friday, he backed off by saying he did not mean
it. Nevertheless, the markets don’t trust socialists such as Hugo
Chavez of Venezuela and Morales of Bolivia. Witness the sad story of
Crystallex (KRY) which has spent ten years and was shovel ready to begin
mining on Las Cristinas when Hugo decided to hand
the permits over to his Russian friends at Rusoro
Mining (RML.V), a Canadian Based Russian Company. Such
geopolitical uncertainty can only limit supply in an already tight
market. Silver is such a small market that it doesn’t take much
to start a stampede. If you sell your silver you are stuck with paper
money. I would rather look to high quality and overlooked natural
resource stocks in geopolitically friendly jurisdictions with great relative
strength to the sector.
Stay tuned to Gold Stock Trades as these exciting and volatile markets
evolve.
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