(This is an excerpt from Friday's blog for Decision Point subscribers.)
While we don't often cover silver, it is worth noticing that it is about 6% below its all-time highs of 48 (closing basis) and moving up quickly. Technicians will assume that there is probably strong long-term overhead resistance at 48, and, considering that silver is in the vertical phase of a parabolic advance, there could be serious problems when the resistance is reached. Perhaps that is true, but I think there are other considerations.
First, let's consider the overhead resistance, which is presumably caused by people who bought at $48 in 1980, failed to exit when silver crashed, and are ready to dump their holdings as soon as they can exit on a break-even basis. Well, their could be some people still have their holdings after all these years, but 30 plus years is an awfully long time.
Next, the fundamentals are much different. In 1980 the move to $48 was caused by massive speculation, driven by the Hunt brothers attempt to corner the market in silver. Currently, people are being driven to precious metals seeking shelter from the insanity of sovereign debt buildup.
Even the technicals are profoundly different, as demonstrated by the PMO on the above chart. The PMO is based upon a rate-of-change calculation. In 1980 we can see how sharp speculative price moves drove the PMO to historical extremes. More recently the PMO has moved to the overbought side of the normal range, but it is not even close to being extreme because the price move has been more steady and deliberate.
As for sentiment, Let's look at Central Fund of Canada (CEF). CEF is a closed-end mutual fund, that owns gold and silver exclusively -- the metals, not stocks -- at a ratio of 50 oz. of silver to 1 oz. of gold. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding precious metals. Currently, CEF is selling at a premium of +2.8% (less than the markup on bullion) which shows that there is not the least bit of froth in the precious metals markets. The chart below shows that is a far cry from the bullish extremes of the past.
Bottom Line: As a technician, looking at a parabolic up move heading toward long-term resistance gives me heartburn, and we can observe that silver is prone to some extreme volatility. Parabolic and/or vertical advances are extremely dangerous. There is simply no way to know when they will end, but they usually end badly, with vertical declines as steep and speedy as the ascent.
However, there are reasons to believe that fundamental and technical conditions exist that will continue to be positive for precious metals. We could hope that, once silver reaches resistance, there will be a nice correction to provide an opportunity for those who missed the boat to get on board. For those who bought at much lower prices, from a long-term point of view I see no reason to be concerned about any pullbacks. The kind of extreme financial crisis that precious metal advocates have long predicted is now actually upon us.
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Technical analysis is a windsock, not a crystal ball.
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