Is silver a gold mine waiting to explode?

Posted on Nov 12, 2008 by in Letters

Is Silver a gold mine waiting to explode? Or how to break the rules and live to not regret it. 

Just today we made smart-alec and commented on Mark Hulbert’s column at Marketwatch (re miserable performance of Dines, Harry  Schultz, and Howard Ruff).  In commentary we said, (an eternal truth) “Never marry an idea.  The marriage will not be happy and the divorce will be expensive.”  The idea that silver will one day be $50 an ounce, or $25 an ounce or $1000 an ounce keeps cropping up.    We have steadfastly resisted the siren call of this idea for years.  

At this moment buying silver appears to be an exercise in futility.  Or a demented exercise.  So we are in the process of acute semantic therapy with ourselves trying to figure out why on earth anyone would buy silver at this point who wasn’t married to the $1000 an ounce idea.  We are not married to this idea.  It is flirting with us.

Let us examine the proposition.  Here is the recent chart:

 

Buying any issue with a chart like this would be of great interest to Dr Freud and Dr Bergler.  Both interested analysts of psychic masochism. 

Two thoughts (or observations) that come to mind: 1. In September from the 16th to the 23rd silver moved $3.34, or 32%.  $2.58 of this move took place in two days.  So getting on board this quicksilver pig when it explodes is like trying to catch the silverstreak express.  2.  Then it is a habit or practice of the silver market to wipe out weak (and sometimes strong) holders by taking the market down like a roller coaster going over a cliff.  

 

You can see a number of examples of this behavior in 04 and 06.  The time taken to recover to new highs is almost two years in each case.  

The present case is extreme.  An enormous downwave, much greater than what one would think appropriate.  Of course the financial crisis of 2008 is sui generis.   We think extremes breed extremes.  The present extreme is so extreme (Please don’t email and tell us about this.  We do it deliberately hoping for the Pulitzer Prize.) that we think it might breed further extreme extremes.  From the top of the wave to the bottom is 1241.5, a wave of 59%.  The downwave pierced or neared two long term support levels.  $8 to $9 seem appropriate or not unreasonable price levels in the present extreme environment.

So we think the present price levels represent low risk.  Well, low risk considering what has gone on up to this point.  Price today 980.5, a Basing Point at 853.  Another tenuous basing point is at 930.  Price might be considered to be in a narrowing channel, with a downwave within the channel in process at this moment.

The Big Picture

Yes, what about the big picture?  Here it is:

 The horizontal line marks in my analysis a humongus rounding bottom which has not yet been fulfilled.  From the horizontal line to the bottom, 1493 to 353.08 gives a measurement of m/l (more or less) 2664.62 (m/l) as marked on the chart.  If all of this, marked from the 4911.69 top is a rounding formation then $5000 silver is not out of the question (joke).  

As for the risk anyone who can set a stop can deal with that.  However no tyros should plunge into this market without expert help.  And even experienced investors should be acutely aware of the dangers here.  We have repeatedly inveighed against buying issues in downtrends.  While this is not an Enron you can still get burned – but the degree of the burn can be controlled.  We would opt for a stop under the lowest basing point and we would divide our capital commitment to this market into 7 units and start with 1 unit.  That unit should incur a risk of no greater than 2-3% of total capital.

Now, as the Lone Ranger said, Hiyo Silver!

One Response to “Is silver a gold mine waiting to explode?”

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