Originally published September 14th, 2008.
It is not for nothing that silver is called "poor man's gold" for when the going gets tough it's the poor who disappear first under the wheels of the rich man's carriage. Thus, while the commodities rout has resulted in gold dropping by about a quarter from its highs, silver has plunged by a staggering 50%. In the last update we thought it had bottomed at about $12.30 as it was so oversold, but after a brief recovery rally it fell even further to an intraday low at about $10.20 on Thursday, hammered lower by continued dollar strength. Now, however, with signs that gold has hit bottom, or is about to, and good reasons to believe that the dollar is topping out, as set out in the Gold Market update, the savage decline in silver looks to have about run its course.
On the long-term chart we can see that while silver looks significantly weaker than gold, it is also incredibly oversold after its latest downleg. Unlike gold, silver broke below its 2006 and 2007 peaks and then dropped back through its 2006 - 2007 trading range to approach another strong support level above its 2004 and 2005 highs. While the picture for silver is overall weaker than that for gold, it is now horribly oversold and due a huge bounce which is likely to run it quickly back towards the resistance at the lower boundary of the top area at $16, in favorable conditions for the sector. The big question for traders aiming to capitalize on such a move is whether it will first drop further into the support shown in the $9 area, which is very possible, as silver is still performing poorly relative to gold. This, of course, depends on the dollar, which as pointed out in the Gold Market update, is showing signs of topping out, but may run a little further towards about 82 on the index before it's done. Probably the best way for traders to handle this is to start taking positions now but rapidly expand them if silver drops further into the support in the $9 area, as this would result in it being even more oversold with even greater snapback potential.
Much more so than gold, the silver chart begs the question "Is the bullmarket over?" While this may seem like a stupid academic question for anyone who bought around $21 early this year, it is still important to attempt to answer it. Despite the huge breakdown below the long-term moving averages and the fact that these are nowe turning down, and the failure of various support levels, the answer is no provided that the support shown on our chart holds.
Although not as strongly bullish as the gold COT chart, the silver COT structure has definitely been heading in the right direction, with a substantial reduction in the Large Spec long positions (after the rout of course) and in the Commercials' short positions.
What about the potential implosion into deflationary depression detailed in the article CATASTROPHE THEORY and the US ECONOMY? - might that not be an explanation for the recent collapse in commodities and surge in the dollar - and if so could this not continue to lay waste to the commodity sector generally? Yes, it could, but the latest indications in gold, silver, the dollar and their COT charts and in the performance of Precious Metals stocks is that while this risk continues to lurk in the background, and while deflationary forces are gathering stength in the background, it might not take center stage for a while yet, maybe not for a year or two, and in the meantime the hyperinflationary effects of the enormous increases in the money supply aggravated by government largesse in bailing out major banks and other big institutions has the potential to generate an enormous rally in Precious Metals. The Fannie and Freddie bailout was not about providing a genuine solution to the problems that face the US economy, its purpose was to buy more time for the Fed, the government and Wall St, rather like a child reinforcing the walls of a sandcastle on the beach as the tide comes in around it.
