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« Endeavour Silver Corporation: On the Acquisition Trail | Main | Silver Standard Resources Incorporated: Bottomed Yet? »

Silver: The schizophrenic metal

Silver Chart 09 February 2010.JPG

When commentating on silver prices, silver bugs, including us are quick to point out that silver has two properties and therefore serves two purposes, both as a form of money and as an industrial metal with many applications. These two properties are fondly referred to as good reasons to own silver and its associated stocks.

However, both of these properties have two faces and they can behave like a double edged sword. When thought of as money silver tends to mirror gold and make gains as gold heads higher and the dollar heads lower. At the moment we have the dollar heading higher which is capping the progress of gold prices and also putting a wet blanket on silver prices.

Silvers industrial use is much greater than that of gold and as so there exits a correlation between silver prices and the broader stock market, albeit a tenuous one. Now, we see the broader markets as being overbought and due for a serious haircut. Should this come about then it begs the question of just how many investors will view silver as an industrial stock and decide to dispose of it accordingly. No doubt some will be sellers if and when the sell off begins. How far will they go, how much stock will they sell, how will gold perform, will the governments of distant lands see it as a buying opportunity, etc, plus many more variables that we could add to the pot.

If we now take a quick look at the chart we can see that the Bollinger Bands are growing ever wider, reflecting the increased volatility of silver prices. It should also be noted that silver has now dipped below its 200dma, something we have not seen for awhile. Note that RSI is below the '30' level which suggests that it is now oversold and that the other technical indicators are more or less on the floor.

If you operate a trading account as well as holding a core position then this kind of volatility can be useful to you. After all if silver prices were going sideways then there would be no real opportunity to trade. Options traders would be well advised to pay close attention to where silver is now and look for signs of either further deterioration or a possible rebound in both silver and the silver producing stocks.

We lean towards the rebound but it could be a week or two before it starts or it could start as early as tomorrow. So we need to use this time to study the charts of both silver and silver producers and seek out that nerve jangling opportunity. For those interested in Options Trading please click here.

All the best.

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