After a cracking start to 2008 silver has dropped back from the heady days of $20/oz to close on Friday at $17.82, so the question we face is what lies ahead for gold’s sparkly little brother?

The following will cover some of those factors that we need to take into consideration before we decide to make a trade.

The US Dollar springs to mind as gold is still linked to it and gold still reacts in an inverse way to the US Dollar. We are anticipating a period of consolidation for the US Dollar, which will hamper gold’s ability to head north. Although the fundamentals are a lot different to that of gold’s it will be difficult for silver to make progress if gold stagnates.

Gold itself has put in a terrific run and could be subjected to profit taking if market sentiment deems the rally to have stalled for time being.

The price of oil has popped up again which is usually considered to be a driver for inflation and therefore good for precious metals. However, a fall back will have an adverse affect on gold and a negative knock on effect for silver.

The demand, whether from the jewellery sector or from the industrial sector tends to wane when silver prices are perceived to be too high.

Another dismal performance by the financial sector could bring about yet another credit crunch and out go the precious metals with the bath water, a case of sell anything to raise cash.

There is also the seasonal effect to be considered. The ‘Sell in May and Go Away’ crowd may decide to cut and run and take their cash to the sidelines. Is it different this year? Is it worth it to pull out and then have the problem of deciding your re-entry point? How much do we take off the table? Half of it, all of it? Do we ignore it and sit right it? It comes down to each individuals requirements, targets, aversion to risk, time available to focus on the issues, etc.

The bottom line is that we are invested in this sector to make money. This involves taking profits on the way up. Anyone can buy silver stocks, in a way that is the easier part of the trade. However, deciding on an exit strategy that suits you personally is a lot harder. Recognising that your favourite silver stock is ‘overbought’ is one thing, but pressing that sell button is something else and is particularly hard to do in a precious metals bull market.

For the small group of investors that we represent our strategy has been to maintain a core position in this market as it has been heading north since 2001, generally speaking. This core position gives us a stake that will appreciate when the market rises. The second part to our strategy is to try and take advantage of this markets oscillations. When we spot a stock that is lagging behind comparable stocks for no specific reason then we will to look to accumulate. When a stock has run too far ahead of itself will look to realise some profits and watch for the aberration to work itself out, thus presenting another buying opportunity.

A little flexibility is called for as we are wearing two hats and the trades that we execute will determine how much cash we have on hand at any given time. It can be uncomfortable to have cash on the sidelines as it is viewed as non working capital. However, without it we are unable to take advantage of an opportunity should it present itself.

To conclude we see silver going sideways and consolidating over the summer months. This action will form the foundations for a large rally commencing in September 2008. The moving averages will have risen to support the price of silver and the current aberration will have been removed. Between now and then we need to have ear marked the silver stocks that we wish to have in our portfolio and look for suitably low entry points in order to get the maximum the bang for our bucks.

Finally don’t be too despondent when the market does go sideways or your stock looks a little lacklustre. These are opportunities to be grabbed with both hands and to be savoured at a later date.

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