Silver: Poised To Move!

Silver is poised to move for one very simple reason, it follows gold.  Gold has a week or two, at most, before it launches into the strong fall season.  The festival and wedding seasons in the east are about to begin which will bring more jewelery demand to the market and it looks like “helicopter” Ben Bernanke is loading up to  drop more dollars into the inflationary mix with another package of  Keynesian “stimulus”.   Quantitative easing to infinity and beyond! These two totally separate events, when combined, set the stage for silver: poised to move!

Silver

In the middle of May, silver reached $19.50 and then began a steady decline until it reached $17.50 by the end of July.  Not exactly a spectacular summer, but one that is part of the reason why silver should shine during gold’s fall move.

If you look at silver as the poor man’s gold , you will note that as gold demand increases, silver shadows it and sometimes passes gold as buying pressure increases. As gold powers through $1,300 per ounce, there will be a lot of media coverage brought on by the financial fear and currency anxieties that sparked the move in the first place. This time silver will out perform gold, because gold is headed into territory that the average working man can’t afford.  Many more people will seek the the financial security of gold’s little cousin, silver.

Gold

Fall brings a variety of events  which tend to increase  global gold demand and with that additional demand, the price of gold.

There are cyclical events such as  the Asian harvest season where, upon completion of the harvest, farmers invest a portion of their surplus in gold and the Indian wedding season which sparks demand for gold and silver jewelery.  Add another round of “quantitative easing” from the western governments and the stage is set for a fall rally in both gold and silver.

Technically Speaking

In the summer of 2008, silver was consolidating  after a large rally in late 2007.  Then the financial crisis burst onto the scene and the stock market panicked and the rest is history.  Silver declined a whopping 53% in just four months, but not for the reason that the financial media was peddling.  “Risk aversion” is the culprit that they cited and it definitely applied to the general equities, but not so much to the precious metals.

Silver and gold were sold off in the crash, because they were the only portions of most portfolios that were positive.  They were liquidated to generate cash to cover calls on losing positions.

Ever since the low point of the anomaly that is the “financial crisis”,  silver has clawed its way back to pre crisis valuations.  Silver returned to its pre panic price levels last autumn.  It averaged $18.07 in July 2008 before the panic, and $17.90 in November 2009.  Since that time, silver has been consolidating sideways building a strong base in the range of the previous high in the upper $17 range.

High consolidations are basing events, that are technically significant.  When new highs are reached, traders become uneasy with the new price until they see if the price has staying power.  Some traders sell, fearing a correction and others buy feeling that the rising price has momentum on its side.  The result of these two opposing views on the market create a “high consolidation”, a pricing pattern that moves sideways near the new highs. The longer the price consolidates in the range, the more traders begin to accept the new higher price as “normal” and not overbought.  Today, $18 dollar silver is under priced and this will play into gold’s next Autumn up leg.

Now compare the DOW’s recovery and consolidation since the Financial crisis, with a chart courtesy of BigCharts.com

The Dow is nowhere near its pre crisis 14,000 high and is struggling to consolidate in the mid 10,000 range.  I’ll take silver over the DOW any day!  Silver’s basing consolidation base has been going  on for a long time while DOW is struggling to base at a significantly lower high.

Let’s Take a look Back At the Ratio Between Gold And Silver

In Feb. 2008 when silver first broke $18 per ounce in the current precious metals bull market, gold averaged $926 per ounce.  This past July,  silver averaged $18 per ounce and gold averaged $1192, nearly 29% higher.  The fact that silver is basing near its 2 year high in the face of gold’s higher price is significant.  I am no expert, but it is telling me that silver will run hard to recover its normal relationship to gold.

The best time to buy anything is when most people aren’t interested in it.  Even though silver is trading in a high consolidation range, silver is not yet on most investor’s radar.  You need to take advantage of this opportunity!

The Traditional Gold To Silver Ratio

Between January 2005 and August 2008, before the onset of the financial crisis, an ounce of silver traded for about 1/55th the price of an ounce of gold.   This ratio was the accepted norm during the “normal” times before the financial meltdown. If this ratio reflects the normal relationship between gold and silver, then silver is undervalued at the $18 per ounce  and should be trading at $22.50 based on the current gold price of $1226.98 per ounce.

Silver is definitely undervalued going into the fall buying season if you use the “old” gold to silver ratio.  I think we are entering a new phase in this leg up, and the ration is going to change for the better.  If I am right, silver will trade much higher than $22.50 during the next move this fall.

Silver Prices And Silver Stocks

Since  silver achieved its highest level of this secular bull, $20.77, in March 2008, new highs above $22.50 will send silver stocks soaring as investors jump on the band wagon. This price rise could be based solely on silver’s relationship to gold, but could there be an added kicker to this story?  I’ll answer that question with a resounding YES and this video from of Stephen Leeb, Chairman of Leeb Capital Management from Forbes TV, explains better than the written word, what I am referring to.

I am not going to speculate on how high silver will rise, but I would like to point out that the industrial applications add an entirely new dimension to the question of whether silver is overbought, or over sold.  There is an added cushion here that tells me that silver bullion and bullion coins are worth purchasing at this level and that silver stocks are a huge bargain at this level with limited downside.

Here are three silver stocks that I have been in, or will be in shortly, for you to consider. As always, do your own due diligence because my risk level may not mirror yours in any way.  So don’t buy something because I like it or own it.  It’s your money that you are dealing with.

1. Silver Standard Resources SSRI  (Currently sitting at$17.07)

2. SilverCorp Metals Inc. SVM.TO  ($7.24 Canadian)

3. Silver Wheaton SLW  ($21.03)

I like SLW the best and I fully intend to add to my position on any short term pullbacks.  After you look at these companies, I am sure that you will agree that they are poised to advance this fall.

Silver is poised to move along with gold this fall and this move is going to be very positive.   Seasonal gold demand hikes, coupled with rising gold prices will get traders excited about silver.  Add silver’s high  consolidation phase for the past year and the “progressive’s” calls for more quantitative easing and all of the pieces are falling into place for a substantial rise in the price of silver and silver stocks this fall.  Silver is poised to move!

Till next time, good luck and good trading!

More Gold Market Analysis:

• Silver/Oil Poised for Move
• Silver Lining!
• Gold’s Next Move
• The Silver Christmas Present
• Gold & Silver: With A Dose Of Caution

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