Wow, Silver

The last time we wrote about silver was in January and at the time we warned that precious metals may be due for a breather. It turned out to be correct – in the very short term – as silver dropped roughly 13% during the month of January. However, that proved to be an extremely valuable opportunity to add or initiate a position in silver as the price has skyrocketed to $40/oz in two and a half months. That would be a gain of 50%, or an annualized gain of 620%! It has certainly been a very powerful move up but is it time to catch a breather, again?

The chart below shows the price movement of silver (represented by SLV) over the last year and a half. The price has climbed from $15 a share in early February 2010 to over $40 a share yesterday which amounted to a gain of 167%. That move can actually be broken down in to three intermediate trends marked by the white, red and green lines on the chart below. As you move from the white line, to the red line, to the green line the slope of the lines becomes much steeper which indicates that the trend has been accelerating. This can also be called a parabolic rise in the price of silver.

A parabolic rise is certainly fun for an investor invested in that financial asset. However, parabolic rises usually mark the end of outperformance for that asset as investor euphoria settles down and no more buyers are left to drive the share price higher. This may or may not be the case for silver right now but it seems like a dangerous place if you are thinking about buying, especially with QE2 ending in June.

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.