Silver Investing—What Happened in 2011, and How To Play 2012? Part 2

In Part 1, we considered recent silver investing price trends. Silver is currently in a short-term downtrend within a longer term uptrend.  Although not discussed, this longer term uptrend has taken place within a decade long (so far) bull market for silver.  The primary driving force of this multi-decade bull market is fundamental forces of supply/demand.  In any bull market there are price pullbacks, usually resulting from short-term changes in supply/demand, or price getting ahead of supply/demand, usually due to speculator activity.

In the silver market there has been, and probably sill is, price manipulation that causes price pullbacks.  Also, in 2011, margin requirements were raised several times, resulting in forced liquidation of long positions in the futures market.

Successful short-term investing must be done within the context of the long-term trend. I believe the bull market in silver will continue for at least ten more years, driven by inflation.  And the price bubble hasn’t even begun to form.  However, I believe there is a good chance of a price pullback to a price well below the current $29-$30 level in years 2012-2013.  In the futures markets, that set the spot price of silver, silver is still seen as an industrial metal.  When it becomes clear that world economies will not recover, I expect the price of silver to swoon because demand will be expected to drop.  What will eventually propel the price of silver upward? A price for gold that many will believe to be at scary high, price bubble levels.  When that time comes, people will turn to silver as a “poor-man’s gold” hedge against inflation.  I do not expect that gold price to be reached before late 2013, and perhaps as late as 2015.  It will take a while for inflation to hurt those who have assets to invest in precious metals, and longer still for them to realize that the Federal government and Federal Reserve cannot control it.

Meanwhile, in early 2012, I believe there is opportunity to make short-term profits in silver by shorting silver.  In Part 1, we looked at a 5-year chart.  Below is a 6-month chart that covers the short-term downtrend we looked at in Part 1.  This chart notes three forms of short-term price resistance.

The first type of resistance is the short-term downtrend, labeled “trend 3,” as it was on the 5-year chart in Part 1.  Several days have passed since the chart in Part 1 was posted, and during that time the price of silver has staged a rally.  Price has bumped against the line, but not broken it.

The second form of resistance is former support.  When price falls through support, that support becomes resistance.  As the price of silver fell, it twice found support in the $31 – $32 range in early October, and once in late November of 2011.  The October support is labeled “former support” on the chart.  If price breaks through the resistance of the short-term downtrend, it may have difficulty breaking through resistance at the price area in the $31-$32 range.

I shorted silver in early December 2011 via Proshares Ultrashort silver, symbol ZSL.  I placed a close trailing stop when price bounced intraday from a low below $27.  I was stopped out with a double-digit gain a couple of days into 2012, which is not bad for a four-week trade.

If silver doesn’t break through resistance of the downtrend line at just below $30, or the resistance of former support in the $31-$32 range, I hope to find an entry point to go short again.

chart1 12pt2 Silver Investing—What Happened in 2011, and How To Play 2012?  Part 2

If price does break through those two areas of resistance, there is additional resistance in the $35-$35.60 range.  This resistance is labeled “former resistance” on the chart.  Three times over a two week period, price tried unsuccessfully to break through this price range.  If price approaches this range, I will be looking for failure to go higher and an opportunity to short.

I want be clear, I do not advocate selling physical silver purchased as a long-term hedge against inflation or insurance against economic calamity.  I haven’t sold an ounce of mine.  However, I believe lack of economic growth, and therefore industrial demand, will keep a lid on silver prices in the short to medium-term.  “Paper silver” prices will remain under pressure and limit short-term silver investing to the upside.

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