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 23rd 2008 when I paid $8.00 a share
for it and I sold it on June 4th 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 26th for
$26.50 and sold the position on April 28th for $47.50. What
was more telling was the crater that followed in the 1st 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 28th 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.
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