Silver in Crash Mode--Time To Get Out?

Silver, the poor man's gold, is looking more like a car wreck than a precious metal as it has fallen over 20% during the last 3 days. The reason for the spectacular crash?Nothing! It is simply the fact that there are more sellers than buyers, which has resulted in a lower price. Silver's chart had been long flashing danger signals as the price has gone parabolic. Over the last few months, silver has rocketed from around $20 to just under $50 at the top on no real news. Yes, we all know about the Fed printing money, so it is difficult to use it as the catalyst for silver's rise. Instead, the rise has been driven by pure investment speculation on the part of hedge funds, retail investors, etc. The general thesis is that compared to gold at $1300 silver looked mighty cheap and was seen as a leveraged way of playing the inflation trade. The play worked well until May 1 2011. It was during the Asian session when unexpected large sell orders stated to hit the silver market, causing many marginal speculators to flee their long positions and embolden would be shorts. This massive selling seemed to come out of nowhere

The Really Bad News--The WSJ is reporting that funds associated with George Soros is selling their gold and silver positions. So far, there is no real proof to substantiate this rumor (and there won't be until Soros files his 13F with the SEC), but it has certainly not helped silver's outlook. There are very few courageous souls willing to take the other side of Soros because of his sterling track record. Further bad news for silver bulls is news that Carlos Slim, the world's wealthiest man is also selling silver.

Chart--The chart of silver is nothing short of terrifying for the bulls. It has all the hallmarks of a parabolic blow-off top which quickly crashes, leaving unsuspecting longs in a world of pain. You can see from the chart below how lonely buyers of silver are. The last time silver got this high (during the Hunt Brothers' episode) it promptly crashed and took over 30 years to recover. Not pleasant.

Silver Outlook--The current direction of silver is decisively down, especially with the recent margin hikes by the CME (and others) tempering investment demand for the metal. Expect gold to outperform silver as the yellow metal did not reach a parabola stage, meaning there is much more price support for gold than silver. That being said, silver is definitely in an over-sold technical condition, which allows for the possibility for a brief bounce. That bounce should be sold. The key levels to look for regarding silver is $36 and $32 which should provide some kind of support.

Black Swan Insights 


1 comment: