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Excitement has returned
to the silver market as the sister metal of gold advances to highs not seen
for ten months. Where is silver headed? Will it take out $21 with ease and
head onto highs that evoke memories of 1979?
Here is the background
to this latest installment in the silver bull story as shown in the chart
below. After a grinding bear market of 23 years, silver entered a new bull
market on 21st March 2003. This bull will last 20 to 30 years as we enter an
age of increasingly greater inflationary forces brought on by Baby Boomer
retiree demands, Peak Oil and Silver as well as the underlying upwave of the
well known Kondratieff wave.
 
In terms of technical
analysis, we believe silver will trace out an Elliott wave impulse which
consists of three upwaves and two downwaves. The first upwave called wave 1
(top of graph circled “1”) started on the 21st March 2003 and
ended an exact Fibonacci 5 years later on the 21st March 2008. Silver is now
in wave 2 (circled 2 in bottom right corner) and despite what you may read about
a renewed silver bull, this is in fact a rally within this ongoing wave 2
correction. The reason we believe this is twofold. Firstly, it is unlikely
that a 5 year bull move will be followed by a correction wave that only lasts
8 months (13% of the wave 1 duration). Secondly, silver corrections tend to
be protracted as we can see in the smaller wave 2 and wave 4 corrections of
2005 and 2007 which you can see marked on the chart.
Our expectation is that
this rally will approach the March 2008 highs of $21 but not decisively take
them out. This is what we call a wave B rally. Wave A took 8 months to
complete (another Fibonacci number) and this wave B will likely take as long
to complete. If the wave B began in November 2008, we would expect it to
finish sometime this summer.
Wave B will be a 3-wave
affair with an initial upmove, a pullback and a final burst to a climax. The
diagram shows these three components of the B wave rally as they unfold
before our eyes. After that silver will experience another multi-month drop which
will take it possibly down to the low $10s at worst before the final death
throes of the wave 2 finish to usher in wave 3.
The fundamentals that
will propel wave 3 will be similar to wave 1 as the economy recovers, silver
demand picks up industrially but again inflationary pressures begin to bear
as commodity demand from China and elsewhere tightens. The inflationary
effects of the worldwide credit crunch bailout will also finally filter
through but we also expect Peak Oil to finally and decisively appear and oil
to breach $200 and beyond. Wave 3 will occupy most of the next decade.
Wave 3 will not be the
biggest move which is reserved for the final wave 5 blow off which will
happen in the 2020s. This will be the equivalent of the 1980 blow off and silver
will by then be in the hundreds of dollars as peak silver now gets a grip as
well as the US dollar sinking under the combined effects of the Baby Boomers
bankrupting the Medicare and Medicaid systems. You will just not believe how
silver will perform in those days ahead but for now it is enough to consider
your increasing silver hoard and expect great things.
In the meantime, silver
continues to whipsaw and entertain its old friend volatility in this
deflationary correction wave 2. Those who buy silver now and have a 10-20
year horizon will not be disappointed. Those who live for the week or month
are advised to hold onto their silver positions but expect a multi-month peak
in the summer months ahead.
Roland Watson
The Silver Analyst
silveranalyst.blogspot.com
All
articles by Roland Watson
Further
analysis and comment on the silver market can be read in the subscriber-only
Silver Analyst newsletter described at http://silveranalyst.blogspot.com where readers can obtain the first issue free. Comments and
questions are also invited via email to silveranalysis@yahoo.co.uk.
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