By John Reizner |
Silver is once again garnering attention as it traded through the $17 per ounce barrier this week.
I am adding detail to my previous post that the case for a sharp increase in the price of silver may now be clearer. At the time I wrote that piece, silver had closed for the trading month of May 2009 at $15.73 per ounce on the futures continuation chart. I stated that the silver price could touch the $17 - $20 range, with the possibility of reaching the old 1980 high range of $32-$42 within one to two years in the form of a blow-off top.
In fact the price rose to a high of $16.25 shortly thereafter before going into a correction. Silver has since rebounded, reaching as high as $17.69 while closing for the week of September 25, 2009 at $16.06 on the futures continuation chart. In view of this action, where might we go from here?
Baby boomers may remember the parabolic rise in the silver price culminating in January 1980 as the Hunt Brothers attempted to corner the silver market. In examining the current position of the silver market, it may be informative to briefly consider some history.
In my view, there were two stages to that dramatic 1980 market top. In the first stage, silver traveled from a substantial low of $6.05 per ounce on January 15, 1979 to $9.30 per ounce on August 13, 1979. This journey represented a 64% price increase in a period of 31 weeks.
The second stage, a rapid price ascent, carried the price of silver from $9.22 per ounce on August 20, 1979 to as high as $41.50 on the week ending January 21, 1980. This 450% increase in silver took an additional 23 weeks to accomplish.
Both stages together totaled a 686% rise in the silver price in a time span of 54 weeks (from January 15, 1979 to January 21, 1980). It was basically one large move in silver, divided into a bull phase and a parabolic final stage.
Though it may be impossible to be certain, we may now be in time for the finish of the bull move in silver. In my view, the substantial low for silver before its currentbull market began was at the beginning of July 2003 at $4.545 per ounce.
Stage one for this run lasted 55 months traveling to a high of $21.40 per ounce on March 6, 2008 for a gain of 471%. After this bull run, there was a retracement to the $8.40 per ounce level, from which silver has increased its current price.
Might stage two of today's run in silver complete a similar move as the 1979-1980 bull market? In that event, silver could rise over $31 per ounce, similar to the conclusion from my earlier post. Support on the downside appears first at $14.71 - $15.62 per ounce. If the low of $12.435 per ounce is violated on the weeklycontinuation chart, then this particular uptrend could remain in question.
Another possibility is that we may see a 600% plus move from the recent reaction low of $8.40 per ounce - which would bring us to an eventual target range of $50 - $58 per ounce.
Aside from the key limitations of chart analysis (editor's note: charts will be featured soon on this site), I think the fundamentals may carry the day. The Board of the IMF has approved the sale of over 12.97 million ounces of gold or $13 billion to be sold to central banks and gingerly sold on the open market. If the sale wins approval from the appropriate government authorities, gold might be affected negatively and silver could fall in sympathy. But this might provide a deeper buying opportunity.
The American government and Federal Reserve's current campaign to bring the economy out of the hole seems to be benefiting the stock market. It is only natural that inflation at this time is somewhat quiescent as the economy only now appears to be emerging from a very deep recession. What remains is that monetary excess usually leads to greater inflation down the road - which might be two or three years from now.
Gold and silver may benefit from an increase in inflation expectations. Gold is now more regarded as a store of value against an increasingly fragile U.S. dollar, though we do appear to be in a somewhat optimistic phase of the precious metals bull market. It is possible that the extent of this bull market could surprise on the upside.
I currently own silver bullion and SLV.