Is the Silver Correction Over?

Fri, Nov 19, 2010 - 11:12am

The first time this latest bit of nonsense came to my attention was in a TED presentation in which a social scientist presented his data, “proving” that any correlation between human happiness and annual income ended at $65,000. In other words, if you make less than $65,000 annually, you’ll generally be more happy if you make more money. But once you make $65,000, there is no noticeable improvement in your happiness if you make more… say, $75,000 or $100,000.

At the end of the TED presentation, the oh-so-smooth moderator asked a follow-up question along the lines of, “Fascinating. Is there a move to integrate these findings into legislation?”

As you, dear readers, are of above-average intelligence, you have probably already figured out where this is going… namely using happiness research as cover for more progressive redistribution of wealth. We’ll get to Vedran’s report on this disingenuous and wealth-destroying trend momentarily. But first, our look at silver.

Yesterday we kicked things off with a guest commentary from technical analyst Steve Belmont of the RMB Group. Along the same lines, we begin today with the observations of trader Brian Pettigrew, writing from the comfort of his nest in Thailand.

Well done on your comments regarding the correction – I like to think that the word “retracement” is perhaps the better word – reflecting its natural occurrence rather than the need to fix something that is incorrect.
Anyway, good idea to give some perspective on the relative depth of these things – if only that they are so hard to successfully “trade.”
Having spent a few more hours over your report, I would like to offer you something just a little more definitive regarding the silver retracement – but again in the light of statistical probabilities rather than “questionable” TA interpretation.
The silver 2hr chart below suggests a strong statistical probability that silver bottomed on Tuesday/Wednesday. Note the following:
  • Silver has retraced Fibonacci 62% (purple line) of the recent short-term run-up
  • Price has broken out of a wedge pattern to the upside – breakouts from wedge patterns are statistically quite reliable indicators
  • Price bounced convincingly off the short-term support line (blue)
But also note: the indicators (below) suggest that the “recovery” is heading into overbought territory – perhaps reflecting the velocity of the bounce – but this is not particularly significant for forecasting purposes.
Like you, I increased some of my silver holdings on the strength of these probabilities.
Note also that some silver stocks came back to fill their earlier gaps up – also a good sign. FR is a good example.
Gold has also just broken out of its wedge pattern – but there is yet less statistically significant information to confirm a solid “breakout.”
Again, thanks for your dailies – I always look forward to them, as I do to Ed Steer’s reports.
Planning a trip to Argentina next year – but happy as hell here in a country village bathed every night by spectacular sunsets over the not-too-distant Burmese mountains.
Brian Pettigrew – (far from the madding crowd)

Target Zones for Buying Silver

Jeff Clark, BIG GOLD

Yesterday, we looked at the major spikes and corrections in gold in order to determine where we might buy, so let's look at the same with silver today.

As you know, silver is more volatile than gold. That means two things. If you own it, expect the price to have bigger surges and larger downdrafts. And if you're buying it, you have greater opportunity to snag it at lower prices.

Let's first look at all the major spikes in silver since the current bull market started in 2001 (those greater than 10%).

The far-right bar represents our most recent surge, and you can see that the 59.6% return logs as the second highest advance to date in this bull market. The average of all spikes in our current bull market is 31.2%, so our recent jump is almost twice the average. At a minimum, some consolidation was in order, and a bigger-than-normal correction should not surprise.

As with gold, though, I think the Big Spike is still ahead; silver soared an incredible 443% in 1979 and jumped 53.5% in just three weeks in January 1980.

How far does silver fall? The following chart displays all major corrections in silver in our current bull market (defined as a retracement of greater than 10%).

The average of all major corrections is 19.7%. Based on the London PM fix of $28.55 on November 9, silver would fall to $22.92 if it matched the average decline. As of Wednesday's close of $25.20, silver has fallen 11.7%, comparatively small.

If we remove the '08 meltdown, the average of all pullbacks is 17.7%. If we hit that average, the silver price would fall to $23.50.

Since silver logged its second biggest run-up, what if it matched its second biggest decline? If we again remove the '08 aberration, a 33.7% correction would take the price to $18.92. Only in a full-blown deflationary sell-off do I see silver losing a third of its value. And if it did, I'd be turning over couch cushions to find every spare nickel I could to buy it.

Remember, with silver's increased volatility, you can set stink bids (if you're buying an ETF) at lower percentage drops than where you might for gold. If you're buying physical metal, which is where we think your first dollars should go, then keep your dealer's phone number or website handy, as the price can move abruptly.

Based on this data, if the correction continues, a pullback between 17% and 19% wouldn't be too surprising. And that makes prices between $23.50 and $22.92 good target zones.

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Senior Editor, Casey's Gold & Resource Report
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