Silver Investing—The Big Picture

The last 12 months has not been good for silver investing.  The volatility of silver provides opportunity for stellar annualized short-term profits through derivatives.  And short-term investing is the domain of technical analysis.  But the price of silver and gold often crash for no good reason.  Price breakouts fail, short term up trends are broken often, despite the fact that the fundamentals have not changed, and if anything, have become more bullish.  As mentioned in previous posts, that reason is price manipulation.  Some speculate that the purpose of the price manipulation is to punish speculators—to hurt the pocketbooks of the long side speculators that drive price up in the futures markets.

The only reason the macro economists that I follow can think of for the manipulation of the price of gold is to stabilize major currencies.  That makes more sense to me than punishing speculators, although it does have that affect.

The 5-year silver chart below shows the big picture.  Silver began an intermediate down trend a year ago.  There is no doubt that silver got ahead of itself in its run to $50.  A sharp correction had to happen, and did.  So far, price has corrected over 70% from its high of a year ago, even though the fundamental price drivers are stronger than ever.

There are two types of price support noted on the chart; trend lines, and previous price points.

April silver investing chart

There is price support at the $26-$27 range, which held about four months ago.  There is strong price support in the $20 range, which happens to be the price level at which JP Morgan is reported to have held massive short positions a couple of years ago.  JP Morgan still holds massive short positions in silver.

Note that the long-term uptrend line is crossing above the $26-$27 price support range in April 2012.  The 1-year downtrend line intersects that price range in about four months.  Which will prove stronger, the downtrend or the uptrend?  There is no way to know.  Furthermore, the natural course of events may be subverted once again by manipulation—huge sales of gold in the futures markets as was the case a month ago.  I think more manipulation of gold, which will also affect silver, is very likely in the next year.

Which brings us to the intersection of the downtrend line with the strong price support at around $20– about a year from now the 1-year downtrend line intersects the $20 price support range.  As mentioned in previous posts, I believe economies in developed nations are headed beyond recession and into depression.  Since silver is seen by professional speculators as more of an industrial commodity than a precious metal, when the markets recognize the probability of recession and possibility of widespread economic depression, I believe the price of silver will plummet.  I predict the $26-$27 price range will be broken.

I won’t be selling my physical silver.  But neither will I be buying more physical silver until price resumes a strong long-term uptrend.  And neither will I be going long on paper silver until after the professional speculators react to the potential of economic depression.  I’m expecting silver to trade in the $20 range when that happens.

And I’m hoping the massive short position at JP Morgan will finally be unwound at that time so silver investing can get back to its normal level of unpredictable volatility.

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