Well, it had to happen sooner or later. In fact, I thought it would be sooner.
Silver has been walloped.
In a mere three trading days it has gone from just shy of $50 an ounce to $41.
This isn’t the first time something like this has happened. And it won’t be the last.
So what next?
This latest plunge is typical of silver
Let me say this at the outset. I really like silver. I like to hold it. I like to look at it. In fact, I often think it’s nicer to look at than its more expensive, yellow cousin. I like its history. And, perhaps most of all, I like what it does.
I find its uses in medicine incredibly exciting. I find its technological uses incredibly exciting. I find its monetary potential exciting. But I am under no illusions. I know what can happen. I’ve been burnt by silver before. I’ve had my ‘paid tuition’. That’s probably why I am so cynical.
One look at a silver chart shows that it is characterised by spikes. Up and down. I’m afraid that comes with the territory. It’s incredibly volatile. That’s just how it is. If you can’t stand the heat and all that, then don’t trade silver.
All the same, a $9 correction in barely two days is quite something. But it’s happened before. And in recent history.
In fact, that $9 fall is only a 20% correction, give or take. I’m afraid that suggests to me the correction is not over.
For example, in spring 2006, silver went on a similarly parabolic run, which ended in May at $15. Six weeks later it had fallen by more than 35%, to trade around $9.50.
In March 2008, silver made it almost to $22. Eight months later it was below $9.
And the move up that began last summer has been the greatest rise of this bull market so far. We can expect a correction of similar magnitudes, giving back as much as 60% of the gains we’ve seen since then.
How much further will silver fall?
Keith Neumeyer of First Majestic Silver (NYSE:AG / TSX:FR) said to me at a mining conference earlier this year, “with silver it’s feast or famine”. I’m afraid we’re entering one of those periods of famine.
But that’s a positive thing. Because there will be opportunities to buy some quality companies at knock-off prices.
As we enter the summer – a seasonally weak time for precious metals – there are various scenarios I’m considering.
A fall to $38: The most bullish is that the correction lasts some six to eight weeks. We retrace a mere 38.2% (one of the magical Fibonacci numbers) of the move from last summer, and pull back to the 76-day moving average (the average price over the previous 76 days), where we find support. That would mean an eventual low somewhere around the $38 area.
A fall to $30: If we give back 61.8% of the move from last summer and retrace to the one-year moving average, we’re looking at a move back to around the $30 area. I see this scenario as more likely. There is historical support at this level. It would also be a 50% retrace of the entire move since the lows of October 2008 from $8 all the way to $50.
A fall to $22: But silver is a volatile beast, a glamorous temptress who will lure you to places you never want to go, and it has a habit of behaving in the most frustrating ways possible. It will lie dormant when it should be rising. It will fall when there is an apparent shortage. Then, just as you throw in the towel and walk away, it will shoot to the moon. Given its propensity to disappoint, it would not surprise me to see silver go all the way back to $22.
Watch for the ‘dead cat bounce’
At some stage we will get the so-called ‘dead cat bounce’. The level from which that bounce takes place will tell us a great deal about the scale of the correction we can expect.
I have no doubt that silver will eventually head a lot higher. The fundamentals are too compelling. But the violence of the past two days – and any continued correction – will take a long time to wash out, probably at least a year.
There’ll be trading opportunities along the way, as we swing from one extreme to another, but for the foreseeable future I’d expect a period of range trading. I hope I’m wrong, of course, as I own the physical metal. But new highs? We might have to wait a while for those.
If you have silver accounts with Goldmoney or BullionVault, or even the silver exchange-traded funds (ETFs), and you’re looking at ways to lower your exposure to silver, but keep your exposure to precious metals, one trade to consider is sell your silver on any bounce from here, buy gold, wait for the ratio between the two to rise, then roll out of gold and back into silver.
But just to be crystal clear, I’m talking about trading moves here – for the longer run, you should maintain your exposure to both gold and silver. And if you’re interested in trading, you should sign up for my colleague John Burford’s free spread-betting email, MoneyWeek Trader.
John’s strategy tips will help you to be a more effective trader, and I know that he’s also planning to write about the silver market later this week, so if you’re interested in this most frustrating of metals, I urge you to get John’s very useful trading emails.
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