Silver Prices To Correct After the Next Fed Rate Cut!
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| Topic: Silver — January 27th, 2008
Silver has gained roughly a dollar since the begining of 2008 and silver prices have increased a massive $5.00, or over 43%, since we gave a BUY signal days after silver prices hit a bottom in August.
Silver is also up $2.00 since our triple BUY signal a little over a month ago, on December 7th 2007, when we flashed three BUY signals on silver stocks Silver Standard, Eagle Plains and Endeavour Silver.
However it is important not to get caught up in the recent success of silver and the precious metals. Nothing goes up in a straight line, and corrections are part of a bull market. We think that silver and gold are due a correction soon, after enjoying such a run up into fairly overbought territory. The last spur upwards should be after the Fed meeting next week, where Bernanke will almost certainly cut the interest rate again.
After the rate cut, we see silver prices weakening back to around $14.50 before consolidating and preparing for the next leg up in this silver bull market. If a trading opportunity presents itself, we will look to trade silver after this correction, as we have done before.
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From a technical perspective, silver is a fair way from its moving averages (although not as much as gold – please see recent article here), and the MACD appears to be preparing to give a bearish crossover signal. The Relative Strength Index is quite high, and will be pushed even higher when the rate is cut this week. This will put the RSI into very overbought territory, signalling the end of a rally and the beginning of a correction.
Another factor that has caused us to look cautiously at silver is that silver stocks have not followed silver since December as much as they should be doing. Keeping in mind that silver stocks tend to lead the silver price, this suggests to us that the stocks do not trust silver at these prices and are awaiting a drop in silver prices back to more reasonable levels.
However due to the nature of the precious metals market, and silver in particular, this correction could be over and done with before many investors realise it has started. Silver has a tendency to behave with more volatility than other metals, especially where corrections are concerned. Over the past few years silver has dropped hard and fast, in brief but sharp corrections, and it is likely that this could be the case again.
So if you have investments in silver or silver stocks, watch the market carefully this week as we could be approaching a short term top in silver prices. However if you are investing for the long term, under a “Buy and Hold” policy, then you may want to ride this dip out as long term silver prices are heading way higher than current levels.
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This is why I subscribe to this site. Several newsletters I read are seriously bullish on silver (as they should be), but I’m almost always disappointed when I ignore high RSI and MACD readings in the short-term. Also, I find it interesting that Alex Roslin (the COTs Timer guy) said that the large speculators (dumb money) are building up their net long positions. It’s not to a historic extreme (which is bearish), but it’s heading that way. Something to note.
Here’s my strategy: I have some calls on a silver stock. Since they’re up somewhat, I’ll put a stop near the break-even level just prior to the Fed meeting. If news is good (50 basis points or more), then I’ll move up my stops as silver rises. If news is bad (25 points or less), then my stop will be triggered before I lose much.
I think that $14.50 will be an excellent price at which to re-enter the markets and re-establish call positions (for traders), as well as to buy stocks and bullion.
Comment by DBR — January 27, 2008 @ 4:50 am
DBR, Thanks for your insight its really good for us to get some good feedback.
For those readers who have a different opinion please feel free to write in and say so - it all helps to add balance to the debate and hopefully we will all make better trading decisions.
Comment by Silver Prices — January 27, 2008 @ 8:08 am
DBR congrats on your well thought out comments on silver trading.I intend to note them and trade my silver position accordingly. Right now I,m selling my silver contracts into strength and hope to go long when silver corrects down to the $15 level, or to whatever level it gets to. All the best for the future
Comment by ian — January 28, 2008 @ 10:59 pm
No problem! Looks like you had your strength to sell into. I did the same. Unfortunately (for those long), the rally didn’t last long. Since gold, silver, and the $HUI hardly reacted to another major interest rate cut, it looks like other PM investors think it’s about to take a breather. The rest of the week should be interesting. …
Interesting action in the broad market too. I just heard Jim Cramer declare that the bear market in financials, real estate, real estate builders, and US auto makers is over. (He actually said that.) If that’s the case, I wonder why the Dow and S&P 500 experienced massive selling at the close, even with imminent MACD crossovers!
Comment by DBR — January 30, 2008 @ 11:57 pm
well an other interesting day in the world of silver its the 6th straight day that it has gone higher, my question is how much higher can it go before we see some kind of significant pull back? Personally I can see it taking some time yet.
Comment by Paddy — January 31, 2008 @ 11:45 pm
It could go higher. But take a look at some silver stocks, SLW, SSRI, PAAS, and HL. Each had a down day today, and this on the very day that silver hit a multi-decade high of $17. Also, the HUI (gold stock index) dropped 10 points today. So, in my book, precious metal stocks are not following the metals. Why? Because traders feel that they’re overbought and due for a correction. With this large group of traders moving to the sidelines, I don’t think that this buying pressure will last long.
Comment by DBR — February 1, 2008 @ 2:15 am
I agree with you in some respects DBR Silver is due for a correction but it is just not coming at the moment traders are driving it higher regardless of the fundamentals, and that is a dangerous thing. it pushed right through 17.00 this morning with no hesitation and continues to march on. it has hit some resistance around 17.25 but for how long??? Have you thought that maybe the silver stocks are lagging behind and if silver continues with this strength they will just play catch up?
Comment by Paddy — February 1, 2008 @ 10:59 am
Why is it that SLW is going down while the spot price is going up? Are the investors in SLW just more savy than those buying silver at the spot price? or could there be other factors raising the spot price?
I am new to this, but remember last fall, seeing SLW go down below $10. I watched it with amazement and like a newbie, did not get in at that time. I knew I should have because it went to $18 and then $19.
I want to ride that one on the next go around.
Any comments on SLW in particular?
Comment by Ray — February 1, 2008 @ 4:05 pm
Well, it looks to me like the correction might be underway, does anybody else agree? looking at the drop in gold today and with silver dropping 50 cents off its daily high, also on the daily chart a very long wick has formed, I have noted this as being a very strong single on past corrections. Anybody agree/disagree?
Comment by Tom — February 1, 2008 @ 9:30 pm
I think that Patty made a good observation earlier when she said that sometimes investors pile in at the end just because the metal’s going up, regardless of the fundamentals. It’s usually at that time that the “smart money” is getting out of PM stocks, probably because stocks are easier to sell than bullion (it’s tough to trade bullion). That’s what we saw yesterday - the HUI (goldbugs index) dropped (”smart money” getting out), just as gold and silver were making new highs (”dumb money” piling in, late as usual). Ironically, this will probably be reversed when precious metal stocks and bullion hit a bottom.
Comment by DBR — February 1, 2008 @ 10:13 pm
Oh, and as for comments about SLW, it’s been hit a bit harder than the other stocks possibly because there’s been a rumor that Goldcorp (GG) is looking to sell its 49% share in SLW. Goldcorp may just be looking to raise cash for its projects, so I doubt it has anything to do with SLW’s fundamentals, which are stronger than ever. You might see a decent buying opportunity if there’s something to the rumor.
Comment by DBR — February 1, 2008 @ 10:22 pm
Hi DBR, just a bit of info for yourself its actually Paddy (short for Patrick)and I’m male. No harm done just thought I clear things up. And thoughts on how far silver will pull back before it makes another jump higher? I was looking at what Tom had said and I would agree. I think that it will open much lower in europe on Monday morning after the Asian Trade.
Comment by Paddy — February 2, 2008 @ 5:09 pm
Hi DBR, just wondering, don’t you think there are too many silver bulls at the moment? I mean apart from seeing people talk bout silver regularly and with such bullish tones on CNBC, Bloomberg…etc, do you not think that every minor dip from new highs forged will be bought into. The dollar does not seeem like its going to bounce back anytime soon, it might not cross the 1.50 level against the euro, but the bulls are not paying attentuon to that at the moment. Such bullishness, do you not think might coz a blow-off? Or do you think we are in for a severe downturn?
Comment by Kay — February 2, 2008 @ 7:38 pm
Sorry Paddy. My mistake. I personally don’t think that this pullback is going to be a very strong one. I wouldn’t be surprised to see it bounce off of $16.30, or maybe $16 at the lowest (after all, it’s not nearly as overbought as gold). Not much of a buying opportunity, but better than now, I suppose.
As for Kay’s comment, I wouldn’t be surprised to see silver go vertical in 2008, either in the spring or perhaps in the fall. But it won’t be because people are overly bullish at the moment, but because silver seems to make a 100% annual gain every few years (blow-off top included), and if history repeats itself, 2008 could be the year for it. Plus, it has a long way to go to catch up to gold.
Comment by DBR — February 2, 2008 @ 8:46 pm
Hi DBR,
does that mean we might see more reasonable levels to purchase silver? (sub 14.50)? and if so, any sort of time frame?
Comment by Kay — February 4, 2008 @ 7:29 pm
I have no idea if it will, or when it will be. All I know is that when silver is under $15, I buy it. If it’s not, I don’t. (That’s not to say that $16 silver isn’t a good deal. I just have lots of it already.)
Comment by DBR — February 4, 2008 @ 11:18 pm
Well so much for the correction
Guess DBR you were right, but what do you reckon might happen if the dollar keeps strenghthening (per say)?
If you ask me, I still expect a correction that will run its course by say summer and a major move up starting in fall?
Comment by kay — February 10, 2008 @ 6:47 pm
I think a good guide to predictions is history. If you take a look at the long-term silver chart, you’ll note that silver almost doubled between October ‘03 to April ‘04, and then again between October ‘05 to May ‘06. This run that we’re in looks a lot like those, so I wouldn’t be surprised to see a $20 + peak by April or May. Then a very sharp sell-off (i.e. buying opportunity). Of course this might not happen.
I don’t see the strengthening dollar as much of a problem short-term for silver. Here’s why. The dollar’s weakness is all relative to the strength of other currencies, particularly the Euro. It appears to me that the Euro may have hit a peak and may be heading down, at least in the near term. Although this may cause the dollar to strengthen somewhat, it’s good for silver since yet another currency is devaluing, and currency devaluations (wherever they are) is good for precious metals. But here’s another thing: although silver broke out to a new high against the USD, it looks like it’s just about to against the Euro. When that happens (either by silver rising or the Euro dropping), this will be a major technical event/buying signal to investors who use or follow the Euro. I think that’s why silver hasn’t gone higher, and I think this breakout has to happen for silver’s ascent to accelerate.
Comment by DBR — February 10, 2008 @ 9:07 pm
Is the correction run it’s course after the FED announcement? Do you think it’s time to get into silver for a short run until the end of March?
I am liking Silver Wheaton and watched it go down to $14.50 last week. Should I have bought at that price? I did not because the spot price of silver was still above $15.
Any thoughts on a buy of Silver Wheaton now that is it at $15.21?
Comment by Ray — February 10, 2008 @ 9:17 pm
Has the correction run it’s course, that is…
Comment by Ray — February 10, 2008 @ 9:41 pm
With the announcement by the G7 this weekend of having approved the sale of GOLD held by the IMF, what impact do you think it will have on the short term if any at all
Also do you not htink a huge crash ,ight be upon us
sorry couldn find the auestion mark on this stupid azerty keyboard lol
Comment by Kay — February 11, 2008 @ 12:06 pm
SLW closed at $16.49 today, has rallied nicely recently, maybe the start of something big!
Comment by Silver Prices — February 12, 2008 @ 4:52 am
Boy, this has been an active thread! Thought I’d add my lastest two cents. I personally think that this latest rally may have run its course (short-term). Gold and silver are both overbought, and seem to have stalled out (possibly due to the announced IMF sale). The HUI and gold stocks seem to be stalling as well, although most aren’t nearly as overbought as the metals.
I’ll be holding my long-term shares no matter what, but I sold my short-term silver speculations this morning (call options) since I’ve made some good cash, and since the risk-reward ratio is no longer in my favor. I could be wrong, and silver/silver shares could have a huge rally in the next week or two, but I’m not comfortable making short-term speculations in this environment.
Comment by DBR — February 12, 2008 @ 4:44 pm
Update on my previous comment: Things are looking somewhat bullish this morning, so I may be sorry that I stayed on the sidelines. But it’s still a high risk environment, and I’d be surprised if PM shares didn’t correct in the next 2-3 weeks. But there may be a short-term opportunity here.
Comment by DBR — February 13, 2008 @ 5:54 pm
DBR, You have got a core position in silver so you can relax a little and wait for the right trade to present itself
Comment by Silver Prices — February 13, 2008 @ 6:42 pm
Do you that were talking about selling on Jan 28th at about $16.50 and waiting for a drop to $14.50 to re enter the market think it was a good idea? This round I got in just before Christmas around $14.30-50 and am still in. Wish I could figure out where we are going from here. This 32% increast in 8 or 9 weeks has me spooked. Is our dollar going to completely drop out? What the heck is going on. As I write silver is entering $19.30/oz. Pete in Hyder
Comment by Peter Caffall-Davis — February 27, 2008 @ 8:19 pm
Peter, We are also of the opinion that the US dollar is as good as dead, take at a look at the chart that we used in our post on gold-prices.biz yesterday, it does look sick.
Gold and silver values are measured against different currencies, if you look at the bottom of the home page of Kitco.com you will see that gold has increased in value today by 1% against against the USD and by 0.12% against the Aussie dollar - a big difference.
Comment by Silver Prices — February 27, 2008 @ 9:30 pm
is silver going to fall? i read this forum, i have been buying silver bullion and i dont know if i should buy now or wait? i dont have much money im only 22 years old but have around 1000 dollars in actaul silver and bought it when silver was around 16 dollars an ounce. im looking to pick up 50 ounces soon but im now thinking i may be better off waiting… hmmmm. prices gonna fall or what? if i dont buy now will i be a fool because everyday im gonna lose out on money i could be making.. im new at this but i have been researching a lot about silver and gold and feel that im better off putting my money in PM’s rather than the bank. any feed-back would be appreciated. thanks
Comment by bryan — February 28, 2008 @ 8:32 am
I have heard that the traditonal average price for silver is about 1/35 that of gold. Is this so ? It’s 1/49 at the moment.
Comment by Eddie — February 29, 2008 @ 6:32 am
Bryan, consider investing a long run, do not try to make profit on some random fluctuations, that’s what millionaires do. It is probably that by the end of march silver price will go down and stabilize a bit. But by the end of the year it will double.
BTW, here is a tests page to test if you have a millionaire mind:
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Comment by Ker — March 3, 2008 @ 8:57 pm