Friday, January 14, 2011

Hi-Low, Silver!

The price of silver has broken below its 50-day moving average today. From August 23, 2010 until now, the price of SLV (a silver ETF) has gone from $17.61 to $27.61, which is a 57% gain. That annualizes out to roughly 215%. That’s an amazing ride in 5 months. But now that the 50-day MA has been broken is this the time to add to the position or is there more selling to come?

Everyone by now is aware of the bullish argument for precious metals including gold and silver. They’re in a secular bull market that has lasted for 10 years and fiat currency concerns may take them to bubble levels. But technically speaking, they may be overdue for a breather that appears to be occurring, and many indicators are showing this deterioration. The Relative Strength Index (black line in lower part of chart below), which is a momentum oscillator created by J. Welles Wilder, is confirming the price drop as it has fallen to new lows.

Several independent research services, including Ned Davis Research and the folks at the Bank Credit Analyst, have warned us of precious metal weakness in the short term. With their warnings and the emerging technical deterioration, we recently reduced our GLD (gold ETF) position from 5% to 3% in client accounts. We still believe in the secular story for precious metals which is why we maintained a small position, and we may add back to our positions as this correction unfolds. But at the moment, we’re anticipating a little more selling and will wait for oversold levels to start that discussion.