Silver ETF (SLV) - A Safe Port in the Storm

Good Morning Readers.

          Yesterday morning one of my readers emailed me and asked if I would be inclined to open a position in SLV now. She reminded me that I had opened a small position in SLV in May after the correction at $34.00. I immediately returned her email and told her that I had sold that position in SLV several days ago for $35.54 because my charts were telling me that while SLV will be a $50.00 to $60.00 stock by the end of the year, my charts were also telling me that it will be a $30.00 to $32.00 stock first and it may well go to $28.00 to test that level of support. I told her if she was itching to get some silver she should buy a couple of physical Silver Eagles but don’t open a position in SLV yet.

          Let me first give you some history about me and precious metals. When by brother and I were young my grandmother used to babysit for us and since we didn’t watch TV she would get her change out and we would spend countless hours filling the Whitman coin holders. It was then that I first began my love of collecting coins. I have three full sets of Lincoln pennies a set of Buffalo nickels a set of mercury dimes and a set of Washington quarters until 1965. They are not graded and I don’t have some of the more exotic double die coins but I was not collecting them for an investment. I collected them because I loved to hold a piece of history in my hands. It was a love that my grandmother instilled in me and still exists today.

          In the 80’s I watched the Hunt Brothers try and corner the market in silver and I intuitively knew that collecting silver was no longer a hobby. Silver was now an investment. After the silver market collapsed I slowly started to buy Morgan silver dollars and in 1998 I also started to buy gold double eagles. At this point I had never heard of PCGS and NGC. Everything I owned was raw. I did not own graded coins. The problem that I ran into was that it started to become a logistical nightmare. Where would I store these coins? I also had a friend that pointed out to me that if I was going to own this much physical silver and gold I also better own a gun and be prepared to use it. This scared me and I found hiding places in my house and decided that enough was enough.

In 2004, I retired and started to learn about the stock market. I was always interested in how I could own precious metals without actually having to take possession of them. In 2005, I first learned about the Silver ETF (SLV) and the Gold ETF (GLD).

          I will move ahead and tell you that by now I am fairly conversant in these stocks. Let me begin by telling you what I know about SLV and GLD.  GLD has always been a stable stock. There are no wild parabolic swings but it has always been a steady stock that would move 2 steps up and 1 step down but SLV was a very volatile stock and it was not uncommon to see $3 or $4 swings in one day.

While I have owned both stocks since 2005, I will focus this article on SLV. I will fast forward to October 23^rd 2008 when I paid $8.00 a share for it and I sold it on June 4^th for $15.50. At that time the mindset in the country was not yet geared for the mania that has taken over the precious metals market. I bought SLV and it had a nice ride and I sold with a 95% profit. Over the years I have always kept my eye on the stock and by studying the charts I noticed how silver and gold would pull back every six months or so and create a buying opportunity. I started to use this theory to trade in and out of SLV and by using my charts I could tell when it was time to buy in and time to get out. I must confess it was not any brilliance on my part it was simply by using the MACD and the RSI indicators I was able to tell when the stock was oversold and when it was over bought. When it was over sold, I bought. When it was overbought, I sold. The trade always worked nicely. I will add that while I seem to have an intuitive feel for finding the bottoms I have never been very good at finding the tops. However, I never let that bother me because I always remember what Bernard Baruch taught us. He would rather sell a holding and watch it run up another 20% than try to hold on and lose his hard earned profits as he watched it correct.

Then came the crash of 2008-2009 and everything changed. With the fiat money that was printed (twice) people knew that gold and silver were no longer a hobby it was now officially a currency. Gold has always been currency and while silver has many industrial applications it has always been considered “poor man’s gold.” The rationale is that you can buy 40 ounces of silver for what it costs to buy one ounce of gold. This became startlingly evident to me when I bought a large position in SLV on January 26^th for $26.50 and sold the position on April 28^th for $47.50. What was more telling was the crater that followed in the 1^st week of May when the sock went from over $48.00 to a low of $32.00 in five short days. Please see the chart below.

A study of this chart will show the parabolic run that I described followed by the 5 day selloff.

This begs the question when is it safe to go back in the water? You can see that SLV has tried to find a level of support between $33.00 and $37.00. Yesterday it broke my support level and closed at $32.63. What is more disturbing to me however is a look at the MACD, the RSI and the slow stochastics indicators. I have learned to trust my charts and all of these three indicators are telling me that this stock is not oversold yet.

The stock market is a zero sum game. When I sold out of my position at $47.50 on April 28^th someone bought that. I am sure who ever bought that was not a happy camper the following week. The people who were burnt when they bought into this “tulip” mania will not be in a hurry to buy back in. Add to that the fact that the CME raised the margin requirements of SLV five times has sent the institutional investors running for greener pastures like pork belly futures or frozen concentrated orange juice. All of this leads me to conclude that Dr. Bernanke and the Feds will continue their policy of “stealth” quantitative easing. Two examples that come to mind are the release of 30 million barrels of oil from the strategic reserve to artificially drive down the price of oil and the fact that the Feds will continue to buy treasuries by rolling over the interest that is due on the purchases we have made and continue to buy more treasuries.

In conclusion, I believe that despite what is reported, the Feds know that the only way we can pay off the enormous debt we have run up is to continue to devalue the dollar. Having said that I believe precious metals will continue to be the safe port in the storm and I will continue to be a buyer of gold and silver.