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Silver Market Update

Originally published July 11th, 2007.

The technical situation for silver closely parallels that for gold and therefore most of the arguments set out in the Gold Market update are applicable to silver. In this update we will therefore confine ourselves to highlighting the important points of difference between the two metals. One important development over the past week or so for silver has been the improvement in its COT structure that has at last given a major buy signal.

On the 2-year chart for silver we can see how it has stabilized above an important support level in the $12.20 - $12.50 area over the past few weeks. Silver has been weaker than gold in recent months, and broke down from its long-term uptrend in force from 1995 a lot earlier than gold, back in April, to enter a more damaging intermediate downtrend that culminated in a brief but vicious plunge below its long-term moving averages late last month, although this plunge did not take it below the support level mentioned above.

The silver chart still looks weaker than gold, as unlike gold it has broken down below its long-term 200 and 300-day moving averages, although as this break was marginal it may be highly deceptive. Certainly, when the charts of silver and gold are placed alongside each other, the potential for a big move in both is manifestly obvious. As with gold, silver's moving averages are bunched tightly together, along with the price, and while the recent intermediate downtrend and sharp break below its moving averages not unnaturally give rise to fears that it is topping out and vulnerable to a plunge, the more positive gold chart and now highly favorable COT structure in silver are suggesting that there will indeed be a strong move - but that it will be to the upside.

For those wishing to buy silver there are two effective strategies at this juncture. Silver has risen up to meet its still falling 50-day moving average over the past, and thus there is a good chance that it will react back short-term to test the support in the $12.20 - $12.50 zone once again. This would present a good buying opportunity with a stop somewhere below $12.00, but be aware that big money may try to run these stops and flush people out before the big move up, so you may be obliged to liquidate and quickly repurchase your holdings. The other strategy is wait for silver to break above the Distribution Dome shown on the chart before buying, when it will be a significantly safer buy, although the COT chart indicates that it is a safe enough buy now.

 

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