$50 Silver: Sell, Sell, Sell?

  • Print

$49.45 an ounce. That's the high that silver reached in 1980, when the now infamous Hunt Brothers tried to corner the market.

That high has looked down on silver for more than a generation, isolated and dominant, like a fantasy tyrant in an impenetrably high tower.

But on Monday morning, while most people in the UK were lying in bed asking themselves, 'did I really need to eat so much chocolate?', the troops finally made it to the summit once again.

$49.50 was tested. But the advance was beaten off easily, with a lazy, contemptuous waft of the hand.

We are now at a huge inflection point for silver, so let's discuss what might come next.

Silver's brief, but doomed, charge at $50

First let's look at a long-term chart of silver. You can see below how that $50 level (or $49.45 to be precise) has dominated the chart for so long. Silver was obviously going to run into resistance here.

Silver price chart

But since hitting that $49.50 level, within 24 hours silver had already corrected by more than 10%. As I write this it's trading below $45.

That's a heck of a lot of volatility.

When a market goes exponential, as silver has done these last few weeks, one commonly-used strategy to maximize gains is to use trailing stops. Thus you ride the market up as high as it wants to go, but as soon as it corrects a few percent, your stop is hit and you are out.

Every trader will know of the psychological importance of the $50 level and will have probably left stops just a few percent beneath the market, at $48, $49 and so on. As soon as it hit $49.50 and bounced down, those stops – effectively sell orders – will have been triggered, which quickly drove the price back below $45.

So should we be selling silver?

It depends on your time frame.

In the past I have argued that such is the volatility of silver – and such is its propensity to promise so much, yet keep you waiting so long before it delivers – that when you have a profit in silver, it makes sense to take some of it.

I would argue that – such is the run we have just had – it makes a lot of sense to at least sell some as close to $50 as you can. Or to at least hedge your position.

But only sell if you make sure you have a plan for buying back in. $50 is not the end for silver. It may just be 'the end of the beginning'. Eventually, it will go a lot higher. And when silver does break $50, there will be no overhead resistance and it could move higher more quickly than anyone might think. By selling now, you risk losing your position.

And remember, I am the man who – so embittered by silver's promise and its failure to deliver on it – said to take some profit on silver at $30. I thought there would be resistance there. And there was.

Silver did correct from $30 to $26 – before moving within four months to almost $50. Of all my calls – and there have been a lot of wrong ones – that is the one I most regret. So take what I say with a pinch of salt. Bull markets are designed to shake you off. Make sure you don't get thrown out of this one too early.

When silver went to its 1980 high, people were queuing around the block to sell their family silver and cash in. We are a long way from that happening again.

The long-term case for silver

Here is a chart which shows the silver price adjusted for inflation. These are US government inflation numbers, of course. Real inflation is much higher. Even so, they show just how minimal silver's recent run has been in the grand scheme of things.

Gold price chart

(My thanks, as always, to Professor Tom Fischer of Wuerzburg University for the charts)

Compared to base metals, gold, oil and other commodities, which have soared way beyond their 1970s bull market highs, silver has a lot of catching up to do.

Yes, that $50 silver price of 1980 is something of an aberration. The market shot higher because of an attempt to control the market, and a supply squeeze. But the supply-demand fundamentals today, and the monetary policy of governments and central banks, are still heavily weighed in silver's favour. I'd rather own silver than sterling – ridiculous though that sounds, as they were once the same thing.

Talking to Keith Neumeyer, president of First Majestic Silver (NYSE:AG; TSE:FR) , one of the leading silver mining companies, I was quite surprised by his insouciance towards $50 silver. "It went there for a day. It's almost meaningless. The commercials are buying silver at these levels, they stopped buying on previous run-ups. Industry needs the silver." (By the way you can listen to my interview with Keith Neumeyer - and I recommend doing so - in full here.)

Moreover, just flicking through the net, I am overwhelmed by the flood of articles saying sell silver at or near $50. And many of these come from die-hard precious metals enthusiasts. So there are plenty of reasons to stay bullish too.

How gold overcame its nominal high

I think it's worth looking at what gold did as it approached $850 three years ago. Now, with gold at $1,500, $850 seems a long way away, but at the time it was a big deal. $850 had been a spectre above the gold chart for years, just as $50 has for silver. But it's worth looking at what gold did as it tried to break above $850. It took two attempts to get through:

Looking at the silver chart over the last year, perhaps $30 silver is more like $850 gold. Maybe $50 silver will prove to be more like the barrier that $1,000 gold proved to be. (It took gold nearly two years to get over $1,000).

gold price chart

In short, silver is eventually going to go a lot higher – but it's probably not quite ready to go there just yet.

Silver price chart

This article first appeared in Money Morning, the free daily investment email from UK investment magazine, Moneyweek. Sign up here - it's free.

CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

About Dominic Frisby