Silver – the cheap precious metal set for a multi-week rally

US inflation numbers came in yesterday at 8.3%.

The markets were expecting something lower – after all, the oil price had fallen back, not to mention most commodities.

8.3% was above expectations and the markets did not like it one bit. Down they went like liquid through an open sluice. Hopes and dreams of a sustained recovery since the June carnage went with them.

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Actually, not totally.

The US stockmarket is rallying – for now

While the S&P 500, which I use as a barometer for global markets, has been making a sequence of lower highs since the beginning of the year – ie, the broader trend is down – it has also been making a series of higher lows since June, meaning the intermediate trend is up.

Yesterday’s lows are still higher than last week’s lows, which were higher than the July lows, which were higher than the June lows. So there is something of an intermediate term up-trend in place.

If you draw a trendline off both the lows and the highs, they are both still intact and you end up with something of a wedge pattern, as the chart below shows.

If you dabble in such dark arts as day trading, or short-term flips, I would wager that the odds – in the short term – favour going long with a stop just below that rising trend line, with a target somewhere near the falling blue line around 4,200. That said, as we have just seen, rallies could fail at any time, so if the market moves in your favour, you would want to keep moving your stops up to protect any gains.

Unlike some patterns – double tops, head and shoulders highs and lows, for example, which I find quite useful – I have over the years found wedges to be utterly useless as predictive tools. So I am not going to forecast off the back of it.

A long-term downtrend will, in a month or two, assuming both those trend lines hold, which is some assumption itself, shortly butt up against a jittery, shorter-term uptrend and one of them will prevail.

Seasonally, we are coming into a bad time of year for markets. The last four Septembers have all seen sell-offs of between 5% and 20%, so stockmarket-wise, I do not see this as a time to be taking huge risks or making large bets. It’s a time for prudence and capital conservation.

Silver – huge potential that’s never realised

I was, however, encouraged yesterday by the action in precious metals, in particular the dogs of recent months silver and platinum. Yes, they sold off, but on a relative basis they help up well.

This comes on the back of an extraordinary day on Monday when silver rose some 5%.

My ambivalence towards silver is long since documented. There is no other metal with as much potential. It is both a monetary metal and an industrial metal, used in virtually every computer related application you can think of – every phone, every computer contains silver – not to mention all the bio tech.

It “should” be a play on both currency debasement and technological progress. Yet in practice it proves to be neither and, at $19, is trading at the same price it was in 1980.

There is about 15 times as much silver in the earth’s crust as there is gold, hence there is an argument that silver should be 1/15th the gold price – over $100, in other words. But I have been listening to such arguments for 20 years and the metal never delivers.

Silver aficionados scream manipulation, but they have been screaming that since the 1970s. Why would you want to own something whose price is deliberately suppressed by powers far greater than you? Surely you would want to own something whose price is artificially boosted. There’s more profit in it.

I own silver, quite a bit in fact, and I own some silver miners. Because one day, you never know, it might actually go to the moon. That’s its planet after all. I want to make sure I’ve got a seat on the rocket if it does. I don’t think I could live with myself if it went there and I didn’t have exposure, having written about it so much over the years. But I’ve long since stopped holding my breath.

Silver could be about to go on a multi-week bull run

That said, I do think silver could enjoy a multi-week rally from here and I’ll explain why.

The COMEX is the world's largest futures and options trading exchange for metals. There are three groups of traders: the commercials, the large speculators and the small speculators. The commercials tend to be seen as the smart money, and, as they are often acting on behalf of miners, they tend to be sellers and so they tend to be short.

Every Friday evening, the positions of the various traders the previous Tuesday – the open interest, as it is known – is announced. On Friday we discovered something extraordinary. That the commercials are net long – ie buyers – for only the third time in 40 years.

That suggests a genuine shortage of metal.

Meanwhile the speculators, who for the most part do not have metal to deliver, are net short. This opens up the possibility for a short squeeze.

Now this is silver, so don’t get your hopes up and don’t take on too much risk. If it can go wrong it will. But the stage is set for a multi-week rally. If the broader markets correct, then silver will come tumbling down with them. But if they can remain flat or rising slightly, then silver should enjoy a good run.

Buying silver is justifiable on a value basis – silver is cheap below $20. It has displayed lots of relative strength over the past two days. My moving average crossover system is also on a buy signal.

Go silver!

But, remember folks, it’s silver…