In my last article on silver dated almost two years ago on the 13th March 2003, I entitled it "The End of the Silver Bear Market".
After a 21-year drop of 92% in silver prices, I offered the suggestion that the end was in sight and a long-term bull market was soon to be born around $3.60 on October 2003. Using Elliott Wave analysis, I expected a final wave 5 to complete and put the bear into hibernation. As it turned out, the bear was in a bit of a hurry to bed down for the winter and the impulse wave took the form of the less common ending diagonal. Ending diagonals are often seen at the end of protracted moves such as silver has seen. This placed the end of the bear officially at $4.45 on June 11th 2003. Or a time span of 23 years, 4 months and 22 days since the $50 spike of January 20th 1980!In the subsequent two years since that article, investors have had quite a rodeo ride as prices doubled quickly, crashed down and began rallying again with more bumps along the way. It has not been a ride for the faint hearted, but for those who hold hard onto the reins of our silver bucking bronco, the long term rewards will be great.
Now we are at an interesting if not critical juncture in the silver market. The graph below shows the price action since the recent $8.49 high of April 2004. In terms of technical analysis, what we have here is a classic triangle forming and heading towards its apex. The two trend lines forming the triangle are both at angles greater than zero that classifies it as a symmetric triangle.
In the parlance of technical analysis language, a symmetric triangle is a period of consolidation as buying and selling power balance and volume drops. Towards the 50% or 75% point of the apex, volume rises and a breakout occurs to either side as a resolution of the trend occurs. We have passed the 50% point and a breakout could happen anytime. Now the experts I have read suggest that the majority of such triangles break out in the continuation of the trend. The problem we have is whether we have an established trend in silver? The bull market I suggest has been in force now for 21 months. Is that long enough to keep a symmetric triangle happy? We have to look at other factors to decide that. The Elliott Wave analysis is inconclusive at this point. We are in a wave 2 correction, possibly in wave 3 of C as shown on the chart. The current move could drop to the lower triangle support of $6.60 before rebounding or break down further, as the triangle is resolved. The other factor and perhaps most importantly is the US dollar. Since its downturn began in 2001 various assets have been bought by hedge funds and other parties as counter-balances against a dollar drop. Two prime examples have been gold and the Euro. However, it seems that silver has become the plaything of the hedge funds as they seek an extra edge in their portfolio profits. And who can blame them? Given the size and tightness of the silver market, volatility can offer good rewards to those who time their entrance and exit well. A look at the silver versus dollar index indeed suggests that silver is negatively correlated to the dollar with a gearing of 4:1.
And here is the rub; a major rally of the dollar is imminent. As a contrarian investor, when everyone starts decrying an asset, you can expect the unexpected. That does not mean the dollar bear is over, but such a rally will have a medium term effect on silver as investors rush back to the dollar and dump their hedges. In the case of silver, that could mean another jarring drop back to the $5 to $6 region. But, when the dollar resumes its downward march later in the year, silver will again resume its bull market. Also of interest is the blow off in the CRB that is another counter-proxy to the dollar. Though silver has not tracked this index to the same degree, a correction in this exuberant index is also imminent and could affect silver as well. So, which way will the silver triangle break out? As I said, it partly depends on the dollar. There is room for more downside in the dollar but major support is ahead in the 75 to 80 range. The dollar could smash through this support and send silver (and gold) on a wave 3 counter move. My Elliott Wave analysis of the dollar suggests we are in a final wave of the current three-year down move. If this is true, then a break to the silver downside in a similar manner to 1974-1976 period of the last silver bull is more probable. Therefore, in my case at least, a lightening up of silver positions will be enacted at the appropriate moment. Long-term investors need do nothing but desist buying for the time being as another opportunity to load up may appear soon. But do not forget that silver (like gold) is now in a multi-decade bull market, but like a baby it is learning to crawl before it can walk and walk before it can run. Silver stockpiles across the world are meeting the deficit between demand and mining/scrap supply but not for long. Indeed, how much of the current price rise is due to this deficit is difficult to know due to the added demand caused by the dollar hedgers. But that is not the only factor in favour of silver. We are entering a new era of challenges and changes. My own analysis suggests a final price target for silver of more than $750 in our lifetimes as various factors drive investors to hard assets.
You find this hard to believe? Readers may wish to further follow my observations on the precious metal and stock markets in my newsletter, the New Era Investor. The fundamental premises of this newsletter are the impending effects on various asset classes as the post-war, pre-pill Baby Boomer retirement wave hits as well as Peak Oil and the Kondratyev inflationary upwave. In other words, a new era of approaches to investing is coming upon us!