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Monday, May 16, 2011

It's Time To Buy Silver

It is notable that although we were looking for a big medium-term correction in silver, even we were taken aback by the force of the decline. It is astounding that within two weeks, the price of silver fell by approximately 35% and today, the white metal is trading at just US$34 per ounce. It goes without saying that the recent price action in silver is yet another reminder that commodities are extremely volatile and parabolic moves always end in tears.

Now, we are aware that many manipulation theories are currently doing the rounds whereby the affected parties are claiming that silver’s plunge was due to an orchestrated takedown by the banks. Obviously, there is no way to prove this but it pays to remember that when any asset appreciates by 190% in 8 months, most of the buyers have already bought into the bullish thesis. Therefore, after the buying has exhausted itself, profit taking and short-selling bring about the reversal and the price retraces a large portion of the gains. This is how the world’s financial markets have operated since the beginning of time and ‘this time is different’ are the four most expensive words in an investor’s dictionary.

Turning to the present situation, the price of silver is currently trading around US$34 per ounce. Moreover, it is noteworthy that on two occasions, the price of the white metal briefly dipped below US$34 per ounce, however on both days, it closed above that level. This price action leads us to believe that silver is finding some support in the US$32-34 per ounce area and it is conceivable that most of the selling is now behind us.

In terms of the technicals, silver is currently trading only 17% above its 200-day moving average and its daily chart reveals a double bottom formation. Moreover, investor sentiment towards the white metal has changed dramatically and euphoria has been wrung out of the market. Thus, bearing in mind the possibility of a base formation and the negative investor sentiment, this is the time to start accumulating positions in silver.

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