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“Silver volatility ensures constant activity with never a dull moment.” Traderrog
Weekly Silver Futures December on 8-28-06 Shows Full Wave Set and Correction. We are Poised for Fall Rally or Selling to $10.50 Support.
Fast stochastics in lower box predicted flat silver prices and selling pressure for August.
We think silver is moving sideways and waiting for the September fall rally. It can continue
sideways until 9-5-06 or begin its buying wave just before or after the holiday weekend.
Silver Anticipation
Silver traders are anxious to get the show on the road and make some money. This weekly chart is indicating its price is at a fork in the road. Do we stall out sideways and correctively sell down to $10.50 or perhaps something even worse? Or, in the alternative, can we rev the market and begin our annual fall rally? Our forecast says the latter. Notice the buying spike above the word September from 2005 at the far left. In that case, the buying popped almost exactly on the end of August and the first of September. Cycles are close and seasonal but never perfect. This is a Monday, August 28 chart for the week ending 9-1-06. Patterns are saying more sideways moves followed by a new rally on Thursday, August 31 or Friday, September 1st. Since Friday is the start of a Labor Day Weekend with early closings in some markets, we expect buying earlier this week or it shall wait until Tuesday, September 5th for the opener. We recommend our readers wait until we give the go signal with a Trader Tracks Alert. It could be this week or next week. We are watching.
Where are we fundamentally in the silver market?
There is a great deal of confusion in the gold and silver markets as to what exactly each metal represents to cash, futures and equities markets. Silver has always been viewed as more of a commercial metal than gold. Gold meanwhile is believed to be a currency- coin-bullion bars storage of wealth. And, lastly silver has a commercial application for jewelry.
Silver has so many attractive commercial uses it is difficult to think of it otherwise. Yet, when heavy stress is imposed on traditional stock and bond markets silver is recognized as a precious metal and becomes real money through coins and bars. We noted a report some months ago the U.S. Mint was buying raw silver in open markets for manufacturing silver coins. If this is true, they buy because they are out of silver for coin production. Demand for these coins has skyrocketed not only in the USA but in Canada which is meeting accelerating demand with a high quality product.
The silver market is a small one and consequently is quite volatile. Silver gets pushed around with regularity. Smallness has its virtues and disadvantages. The silver market was small enough the Hunt’s tried an unsuccessful corner that financially wrecked them over 25 years ago. The silver market is small enough there is currently aggressive suspicion that certain large traders are manipulating silver in the New York Comex futures markets. This activity has been of extreme concern within gold markets as well. However, true or not, illegal market benders eventually get their heads handed to them when influences beyond their control enter the trading picture.
How Manipulative Paper Shorts Can Lose
How can manipulative paper traders lose? One way is for the paper longs to buy more than the shorts and overpower them. This is perceived as too dangerous as if in fact manipulators are ready to buy large, the longs can be overrun. Foreign buyers of physical precious metals with piles of cash could care less if paper traders rise or fall. Personally, I believe these outside (outside of New York) bullion buyers delight in the destruction of paper shorts and view it as an absolutely marvelous game. If heavy external bullion buyers invest in gold and silver coins and bars; the real physical gold- then those paper shorts become squeezed. These big boys buy but do not sell. Adios metal supplies for market trading and liquidity. In effect the shorts are squashed with their only escape being to cover by buying long. With this result both the physical and paper longs not only recover but receive outstanding encouragement to buy more.
A gold trader I know says one of the best ways to get a good price on physical gold or silver is send in a delivery request to take physical possession of your Comex futures contract at expiration in New York. If a silver trader orders delivery of 5,000 ounces on one contract, the Comex by agreement must deliver it and the trader pays cash. Further, the time for Comex delivery is short. The Comex, for the most part, does not like to see these orders as supplies on hand are, shall we say short? One Canadian metals fund had to wait three months for a gold and silver delivery and then only received a portion of the order. That signal tells us they haven’t got the goods on hand and had to scramble to get it. I wonder if the fund got the rest.
ETF’S Gobble up Physical Metal
The next and somewhat newer phenomenon is the ETF’s. Those are the Exchange Traded equity Funds requiring gold and silver bullion for backing. Some of these funds have no hard bullion backing, some are partially covered and others are 100% covered. When the dust begins to fly in extreme volatility, we strongly suggest our ETF owning readers be absolutely certain their investments are 100% covered with physical metal as represented in the prospectus. Paper is paper and metal is metal. Paper is a promise to pay and metal is the real McCoy-the real stuff. When things get ugly tough in these markets some paper might be only worth paper which is nothing. Be forewarned!
Silver Volatility
We traded silver futures contracts years ago winning some and losing some. Quickly, however, we learned the hard way that pit traders were highly skilled at running stops and taking your money trading silver futures. Wisely we gave this one up as a bad idea.
- Silver traders can buy futures options contracts which eliminates the stop running problem but they get nailed in the front with outrageous call option prices. Instead, we recommend both silver traders and longer term investors use the following tools for trading, risk control and reasonable prices.
- Buy premium junior, intermediate, or senior silver stocks and play the seasonal rallies.
- Buy intermediate and senior silver stock call options and play the seasonal rallies.
- Install a monthly savings program buying USA or Canadian silver coins taking possession. Do not leave them in a bank deposit box and tell one trusted family member where you put them. Keep them with no plans to sell buying more regularly. Refer to Kitco.com for buying physical precious metals.
- Buy the silver ETF Fund iSHares Silver Trust ETF (SLV) and play the seasonal rallies.
What Happens to Silver When Inflation-Deflation Occurs?
Arguments as to whether we are biased toward inflation or deflation should continue to rage for months, maybe years. Analysts who watch and interpret this stuff can provide long lists of key points supporting each side. Our view is for now we have stagflation. This is a doing-nothing-going-no-where economy neither headed for crash city nor upward to New York’s proclaimed resplendent fund heights and peaks.
The beauty of silver is you can play both sides of the fence with just this one market. On the inflationary side silver continues to ride all those splendiferous commercial applications at ever increasing prices. If the boat tips over and we get deflation, silver traders will run to buy coins, bars, silver stocks and the silver ETF to preserve wealth.
When gold takes off running silver is dragged along like its a little kid brother. Naturally, there are transition time periods during shifts from one effect to the other, but generally gold and silver are a great deal from both inflation-deflation market aspects in this crazy environment.
Supply and Demand
Simple supply and demand have a strong effect on silver’s price. This is particularly true as silver is widely used commercially. We have watched with great interest over the past few years as the precious metals rally took silver from $3.50 to $15.50. If you are a good observer, little market hints and reactions appear telling us silver supplies are tight and getting tighter. Powerful controlling authorities would have you believe silver remains plentiful. We say under-supply exists and it continues to get tighter. Prices must rise to accommodate needs.
With the silver market depressed for so many years, silver was cheap and supplies were plentiful. Now that silver prices are 400% above that old number the game is different. At $3.50 or $4.00 there was little incentive for silver miners to explore for more and invest the funds it takes to open new mines. Those surviving strong companies producing silver in larger amounts have been reduced to a handful. All markets come full circle and some take years to arrive. Silver has been depressed since the early 1980’s with one minor up-blip that failed as fast as it appeared. Not any longer. We think the managers and shareholders of productive, large, successful silver mines are sitting in the cat bird seat. It should take years for competition to catch-up. Meanwhile, the current big operators can reinvest profits buying more reserves and becoming richer.
One old grizzled explorer I know who preferred gold, told me there is silver lying all over the ground in Nevada. If that’s true and the stuff is worth $12 an ounce why doesn’t he go and pick it up? After all, at about $400,000 of value per metric tonne, his efforts would be well worth it. What he really meant was silver is discovered more readily than gold. However, cost to explore, develop, permit and build a silver mine is similar to mining gold or most any other ore. The difference is gold this morning is $620 and silver is $12. Which would you prefer to mine if ran a mining business? Actually, with gold more difficult to find and silver prices rising quickly, both metals are a good deal providing the circumstances of reserves and cost structure to extract are attractive. Further, now that silver supplies are short, silver miners can earn handsome profits right now. Expect the shares and corporate earnings of stronger silver producers to rise this fall and this winter.
Here is the New Difference
Silver mining has entered a new era for several reasons:
Silver’s value as a precious metal or currency is now recognized.
Silver’s commercial value has not changed and has in fact increased with foreign demands, medical uses, and a host of other things for electronics. Demand is up.
In our last silver rally of the 1980’s the scrap supply was immense. When prices hit the roof silver came to dealers from unimaginable sources in larger supply. Today, this scrap supply is gone. It is used up. Gold is preserved and held. Silver is consumed for the most part and gone forever. The silver plate must be continuously refilled.
Silver mines take many years to develop. By the time most newly discovered mines could begin production several years will have passed. Demand is increasing and supply is not.
Silver prices have been so low they are years behind the inflationary price curve. Silver prices will now follow gold and play catch-up. In our view both gold and silver will enjoy excellent rallies over the next few years but silver for awhile will go faster as it is so far behind.
In summary, we forecast the completion of a near term market price correction in silver to be followed by a fall rally. Prepare your trading plan for silver as it resumes its rally and watch carefully as silver is viewed less as an industrial commodity and more as a currency and investment safe haven for traders and investors. -Traderrog, Editor, Trader Tracks Newsletter recommends silver and gold for active traders creating and preserving wealth.
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