Quick Update Crew,
I've been meaning to post some analysis for a week or so now, but the fluid international situation makes it hard to be too specific right now. No matter what the charts indicate we can only be tentative about the silver price for at least the next 10 days. In recent weeks and months the chart has been all over the shop; we've had pennants, flags, hammers, dojis, head and shoulders, cups and saucers, and this week we are seeing the makings of a possible double bottom reversal, along with a corresponding acceleration of volume and buying pressure. (This pattern points to a target price of around $65 to $70).
Meanwhile there is a flock of very tired-looking black swans circling overhead, and occasionally one of these breaks the formation, lands, and plays havoc with all the numbers generating major market 'events' that push the metals in totally counterintuitive directions.
For example, the May 2011 drive-by shooting began after JPM deliberately 'allowed' the silver price to rise in a dramatic fashion. (As once commentator said "We are at a loss to describe how surreal it is to see the silver price hurtling skyward with so little in the way of opposition coming in from the traditional short side.")
That uniquely unopposed price rise (followed by five late-night margin hikes - boosting investor entry costs by 84%) 'set up' silver for the subsequent major correction. The collapse that followed near the end of QE2 also silenced the 'inflation' alarms that were going off at that time particularly in the oil sector.
More recently, the "MF Global" heist has indirectly caused silver (and gold) prices to crater further, just as the paper plate of Europe begins to smoulder and catch fire around the edges. One of the reasons for December's price weakness was a strong decline in open interest, due to investors simply closing out their positions and leaving the rigged and discredited PM marketplace. It's a bit like a major hospital bragging that patient numbers are at an all time low without telling you that, well, actually the West Wing was destroyed in a major fire last month...
In other words, the futures market mechanism has begun to self-destruct.
This is leading to a rather unusual situation. The price of silver has continued to go down month by month, but happily, in most cases, the 'issue' that caused that decline was fundamentally bullish for the longer term. A genuine "silver lining" in every cloud or perhaps a pyrrhic victory for the silver manipulators; their short term gain will result in much long term pain, while the patience of silver investors today will be well-rewarded if they persevere.
An example of this "silver lining" can be seen in those investors who are leaving the CME and thus are temporarily weakening the price; there are signs that these good folk are now increasingly becoming physical buyers making the long term picture more bullish than ever.
Or consider this, the December price collapse emboldened many inexperienced investors to initiate new short positions!! (Great call! Right on the bottom, guys!) Those new short positions would have further weakened the spot price temporarily when they whee made, but those guys will be the first to duck and cover when the price begins to recover and their sudden buying will throw a nice handful of petrol on the fire of the eventual rally!
So where are we today?
I think the bottom for silver was in last week (in terms of this multi-month PM correction) although some very good folk here believe we might yet face a further weakening to the $25 region. Time will tell, as always.
We now face resistance (again) at roughly $39 and $31.50 and of course we still need both gold and silver to retake their respective moving averages in the medium term. A breakout might begin around the $37.50 mark once we clear further resistance at $35.
Silver now resembles a huge pile of timber cold and dead-looking but just waiting for a spark!
Silver is in backwardation (yet again!), meaning that any stacker can potentially sell their physical silver for $X dollars today and then buy it back again next month or so for ($X minus N) dollars thereby generating a 'guaranteed' profit on the trade. The only trouble is nobody is that stupid! Stackers everywhere appear to be immune to the siren call of the ready fiat. This is more clearly seen in Eric Sprott's PSLV recently trading with an incredible 20-30% premium to the spot price a real poke in the eye for the Criminal Mercantile Exchange! There are now effectively two spot prices one price for an audited and trustworthy and honourable group, and a much lower price for the CME.
Where to from here?
All of these exogenous market factors are creating a 'hysteresis effect' where the physical price of silver has become increasingly decoupled from the market fundamentals. It's a bit like turning a very 'loose' steering wheel. If nothing happens you turn the wheel even faster until something 'connects'. The silver steering wheel is currently being turned very fast by a lot of 'drivers' but the price is not responding - yet. HOWEVER when the wheel and the price DO finally connect again the result will be well-worth the long wait and a positive feedback loop will be created.
Here's one 'possible' sequence of events to consider...
Once the upward momentum begins, the recent crop of new weak-handed shorts will quickly run for cover giving the price a nice boost.
Then... as the upward momentum builds, those high COMEX silver margins will continue to discourage the smaller players, leaving room for the bigger players with deep pockets - who will NOT be easily shaken out of the tree.
Then... as the various moving averages are all re-taken (and current resistance points become support lines) the larger players who are currently cashed up and waiting on the sidelines will begin to come back to the party.
Then... as the price reaches last year's high point, the 'smart' investors will deploy new short positions to hedge against another 'repeat' takedown, causing the price to weaken somewhat at the sub-$50 mark.
But then... when a new rally unexpectedly begins, those 'clever' shorts will have to cover quickly, giving another boost to the price, and turning $50 into a new line of support.
Then... as the price continues to move upward the large industrial users will see the writing on the wall and scramble to secure their physical supplies.
Meanwhile, as this unfolds in the coming months, the physical supply of silver entering the market will continue to shrink, due to the growing body of metal refiners who are now happily supplying the metal directly to larger buyers (Like Sprott) and are even negotiating rudimentary Futures contracts with them!
Some of the buyers who have walked away from the CME (following the MF Global thievery), will probably be purchasing physical metal outside to the COMEX. These physical buyers are normally very strong hands, who take the metal off the market permanently.
And in the background the E.U. and U.S. will be printing money via low interest loans, mutual currency swaps, loan guarantees and bailouts, and open and secret purchases of each other's bonds.
All in all, I'd suggest anyone waiting for another price drop might like to consider buying their metal soon!
Here's to that spark!!
SPOT USD $29.75 on a Tuesday night
