Technical Analysis: Silver May Be Close To A Major Bottom…
No doubt about it, silver investors have been on one heck of a rough ride this year.
The precious metal has dropped from $32 an ounce in early January, all the way down to $22 as of a few days ago. I have no doubt that plenty of once bullish investors are throwing in the towel on silver. A 30% wipeout probably isn’t what they had in mind for this year.
However, the lustrous asset’s current technical situation reveals a few glimmers of hope.
Let me show you what I mean…
As you can see in this 6-month chart, silver’s recent downdraft was abrupt and unforgiving. But over the past couple of weeks, the metal has held near the mid-April lows of $22.50. For the time being, bears are unable to send the metal lower.
And here’s the deal…
If the US Dollar continues weakening, there’s a very good chance silver uses the $22.50 support level to bounce to the 50-day moving average (blue line) at the $24 area.
Breaking through this important resistance level is the key to additional silver gains as 2013 wears on. As you can see from the red circle, the 50-day has been a strong barrier towards higher prices in the past.
Now, take a look at the longer-term chart…
This year’s breakdown has carried silver firmly below the 50-month moving average (blue circle). Precious metal bears are quick to point out that a drop below this important moving average is a sign silver’s long-term bullish run is over.
But as you can see from the green circle, silver has been in this position before. When panic hit the financial markets in 2008, the price of silver dropped over 50%. That selloff sent the metal below the 50-month moving average- just like it is now.
More importantly, notice how silver resumed its upward trajectory in the years following the financial crisis. The metal went on to notch gains of nearly 400%, hitting just under $50 an ounce in mid-2011.
Of course, things are different now…
In late 2008, the Federal Reserve instituted quantitative easing- highly inflationary measures that kept the US economy from spiraling into deflationary oblivion. As a result, the underlying inflation protection trade gave silver its remarkable multi-year return.
As of today, the Fed is toying with the idea of winding down those same inflationary programs.
And since inflation is currently below 2% (according to government figures), investors are dumping silver for the seemingly unending appeal of equities.
So with all this in mind, what’s next for the white metal?
In my opinion, Ben Bernanke and the Fed aren’t as close to ending quantitative easing (QE) as investors think. In fact, Monday’s ISM manufacturing report came in weaker than expected and actually shows US factory activity contracted in May.
If weak manufacturing data continues, it’s highly unlikely Bernanke will cut QE anytime soon. As a matter of fact, there’s a very good chance QE carries over into 2014. And in such a scenario, investors will likely push silver to higher prices.
On the other hand, if the Fed does taper off QE like so many are now expecting, I wouldn’t be surprised to see silver drop into the $18- $20 price range by year-end.
How do you capitalize on price fluctuations in silver?
If you feel the metal will run higher, the iShares Silver Trust (SLV) is for you. On the other hand, if you think silver is going lower, a position in Proshares UltraShort Silver (ZSL) is right up your alley.
But a word of caution in regards to ZSL…
This is an inverse leveraged ETF. That means a 2% drop in the price of silver will result in a 4% gain for ZSL. Of course, leverage is a double-edged sword. So if the metal rises 2%, ZSL will drop 4%.
In other words, a big silver rally will induce a steep selloff for ZSL.
Until Next Time,
Justin Bennett
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Category: Precious Metals, Silver, Technical Analysis
