“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput






Wednesday, April 20, 2011

Silver blows through Resistance at $44

The silver market is now entering a parabolic phase, a phase that while it can bring enormous profits for those who are long, is also extremely dangerous for traders. Markets in this phase can generate price swings in either direction that will wrench on the gut and turn euphoria into near panic.

The breach of $44 was impressive enough but the fact that it has easily taken out $45 with relative ease suggests this market is on course for a run to $50. The rate of ascent could take it there by early next week but at some point, there will be a rush to ring the cash register. Just know that those who want to trade this mad market, had better be prepared for what they are getting themselves into.

What makes trading a market of this nature so difficult is attempting to place money management stops or at least mental stops. The extent of the price swings are so huge that stops placed too close to the last trade are prone to be taken out in a price retracement which then quickly ends only to see the uptrend resume leaving the trader sitting on the sidelines watching as he misses the rest of the ride higher. Place a stop too far away from the last price and it could wipe out one's margin before it gets triggered. In other words, attempting to set a risk parameter for the trade if it goes sour becomes almost impossible for all but those with very deep pockets whose accounts are well funded.



Volume has picked up on the breach of $44 as expected which has alleviated the concerns I expressed here yesterday as it seemed to be floating higher instead of being driven higher as it is in the process of being done today. I still see a very real fear among would-be shorts to step in front of this thing. A market making moves of 2-3% day after day is primed for a correction but no one wants to jump on the tracks in front of the freight train.

The gold/silver ratio continues to drop in favor of silver and is currently near 33.16 as I write this. It was down below 20 in late 79, early 1980. Could it go this low again? Yes, it could.

24 comments:

  1. The silver chart looks like it got pumped with steroids. I for one would like to see a healthy correction. Somewhere around $36 looks about right. This should also bring silver miners downs which will be a GREAT buying opportunity re: SIL at around $24.

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  2. As a note, I have noticed comments on a lot of the blogs concerning people levering up to chase this market. A lot of them seem to be "newbies" who are just trying to get the most bang out of the run. "Methinks" that they are playing with fire in this market.

    Didn't your friend Jim Sinclair say that one should not use leverage in the gold market (and by extension silver) - primarily due to its wild swings? He probably learned this lesson the hard way. As you point out, a lot of people could get washed out quickly if the market turns and "re-turns", as it tends to do at the "wrong" time.

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  3. Hi all,

    What about this explanation?

    http://www.goldmoney.com/gold-research/anatomy-of-a-short-squeeze.html

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  4. Great post Dan!
    Makes you wonder who, aside from the miners and profit takers, would sell into this rally. If there is really a shortage, then there is no way anyone outside of the actual mining companies will sell short (aside from JPM). To the miners, it may appear to be a great time to lock in a margin on the metal they have in the ground, but a lot of them have openly stated that they will not hedge. The speculators (who typically have no silver to deliver) will have to wait for someone big to step in before they feel comfortable piling on the shorts again. Once that happens, I'm sure a correction will occur. However, there are so many people sitting on the sidelines waiting for a correction that it may be short lived.

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  5. Dan, I believe your post answers my question of whether silver might be running parabolic soon. I think Jim must hop on here from time to time. I just wanted to say his interview on gold speculator was awesome. Do either of you have a book or something ? I really wish I could have gotten my business education with Jim and you. Thanks!!

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  6. I find your analysis of nature of trading silver accurate. Thank you for this blog.

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  7. Dan, this is exactly what happened to me today. I bought silver(may) at $44.90. I sold half my position at $45.21, so i was able to lower my break-even stop to $44.58 from $44.90.

    Wouldn't you know, silver ran back down below my stop of $44.58, so i lost my position only to see silver run back up!

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  8. dfly - sorry to hear that! It is very tough trading these markets because of the extent of the price swings that they are making. It makes money management or risk managment most difficult. Options are another way to work this but the writers have built huge premiums into them to protect themselves. The mini silver contact allows smaller capitalized traders a chance to trade silver without the huge degree of risk but that is balanced out by having less profit potential as a result. The other problem with the mini silver is that because it is thinly traded compared to its big sister, stops can get hit very easily taking that market down even more severely than the full-sized contract meaning that you might be filled at a level no where close to your original stop out point.

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  9. Thanks for the advice Dan! Is it still safe to buy "fish line" declines in silver or could the "fish line" decline turn into a major correction at this point?

    I'm thinking that $50 is inevitable and fish line declines can still be bought all the way up to $50 silver. Your thoughts?

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  10. Dan,

    It has been extremely difficult trying to trade the mining stocks. I don't have the stomach (or money) for the futures market. I've caught parts of the past two corrections and accumulated on the way down, but b/c of the hyper-bullish nature of this market have tended to jump the gun going back in. But, thankfully, nothing catastrophic.

    I took Sinclair's advice years ago and never trade on margin and as meager as my acct. balance is it is more than 80% now OPM. When the hedge funds finally lift their ratio trades, I feel I'm well positioned to take advantage of it.

    As always, I find your insights and teaching invaluable.

    Ta,

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  11. Leverage is a double edged sword. I used a student loan and a student line of credit back in october to buy physical silver, which has worked out fantastic. So I was telling my friend about using debt to invest. He got a student line of credit and entered into the junior uranium market. Was up about $15000. Got greedy and added some more debt, on credit cards to boot... Then Japan came about. Went from a net portfolio value of $45,000 to -$500 in about a 2 to 3 month period. I could barely believe it. I won't ever recommend leverage again, it is a conclusion one has to come to on their own.

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  12. Hello Trader Dan ...

    Got a question for you.

    People say that when silver goes parabolic, we have to get out before the bubble bursts. That makes a lot of sense, but I'm wondering about this. If the economy is in shambles and nothing seems about to change about this situation, and there isn't any other place to go for a safe haven, wouldn't silver continue to be the investment/asset protection place of choice? In other words, wouldn't silver (even if it goes parabolic) continue to be the place to be if the economy (debt, dollar crash, etc.) continued to unabatedly look absolutely bleak, miserable, and frightening? Said yet differently, couldn't one ride a parabolic movement for a long time if the fundamentals are horrific?

    Thanks
    Marco

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  13. marco;

    If the Dollar does indeed crash lower, there will be no where else to run to but the precious metals. That is why it is becoming increasingly serious that the US Dollar is moving relentlessly lower - it runs the real risk of simply collapsing due to technical factors.

    My view is that in a market such as silver, which is increasingly looking as if it is going parabolic, it can and will experience a severe setback in price at some point; however, I do not think it will be the end of the bull run. What I would instead expect is that it gets these sharp selloffs or technical washouts upon any sort of news that might possibly be construed as temporarily being Dollar friendly, only to then continue to stay at a much higher price level after it experiences the occasional sharp fall. In other words, I do not expect it to collapse in price never to rise again. It will move lower at some point, stabilize and then remain at a new and higher level until such time as something serious is done to save the Dollar. As long as the Dollar looks so pitiful, silver will stay rather strong in price, even though its upside move is getting to the point where it is tricky buying in.

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  14. dfly - about the only way to trade this silver market at this point is to use a 5 minute bar chart and the indicators for that time span.

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  15. Hello Trader Dan,

    Thanks for all these explanations.
    Do you think that banks on the short side are in such a desperate situation that it explains the gigantic short squeeze we are seeing?

    Here are extracts of the link I posted above :

    "The short was closed out at about three times the share price of earlier that morning. The squeeze on the bear position had nothing to do with the company’s underlying value: it occurred because one big speculator got into an impossible position that had to be resolved. And that more or less is where gold and silver appear to be today."...
    "The lesson from the London Bridge example is that prices in a bear squeeze can go far higher than anyone reasonably thinks possible."...
    "Perhaps the most important lesson we can learn from the LBS situation – and highly applicable to the situation today in precious metals, which could be developing into the largest short squeeze in history – is that very few other people in the investment community actually understand what is happening. This is something to bear in mind when taking investment advice."
    What do you think about this?
    Thanks a lot,

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  16. Henri;

    believe it or not, I still as of yet do not see any significant short covering occuring in the silver market.What I do see is shorts terrified to place new positions of any size in there. That is why the market is rocketing higher - the offers are not sufficent to absorb all the ready buyers. When the open interest begins to fall, then we will know that Morgan is trying to get out!

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  17. My concern here is that Gold and Silver do not seem to be moving in the same direction. Gold is rising, but nowhere near the same percentage as Silver. If you look at the charts in other currencies (eg AUD, EUR), Gold is going DOWN while Silver is going UP. I would be much happier to see them both move in the same direction. A lot of the precious metals movement at the moment is really FX related. The currency giants are moving!

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  18. Saul - I would not worry too much about gold - it is actually behaving more orderly in my opinion than silver, which is getting rather scary if you ask me. Silver runs the risk of getting too far ahead of gold and lagging it in the future although for now it is the queen of the precious metals complex.

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  19. Dan, Saul,

    That is pretty normal behaviour for silver. It's more volatile (thinner market, etc.) than gold. It tends to move in dramatic ways, at first lagging gold on the way up then surpassing it and over-correcting on the way down. the Gold:Silver ratio is down to 33.22 as of yesterday's close, lower this morning. That chart will correct at some point.

    The divergence in the metals from the perspective of other currencies, I think, ties into the global rise in commodity prices as the industrial demand for silver is being squeezed by the growing investment demand. Agree Dan?

    Be very careful, Saul, as Dan suggests.

    Ta,

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  20. Thanks for your reply Trader Dan. I completely agree with your analysis: wild fluctuations (including temporary sell-offs), but the price will continue to trend upward while the fundamentals remain as horrible (or become even worse) then they are.

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  21. Hi Dan
    Some silver snippets from Australia.
    Perth Mint has announced that they will not accept any new unallocated silver customers after May 1st.  Any existing customers can add silver to their account before this date, but not after.  Unallocated gold is still available.

    A friend rang the mint to see about opening an account and was told that they have "hundreds" of applications and will probably not be able to process them all.

    Also, last week my bullion dealer received 70 x 1kg silver bars and they were gone in an hour.  

    I am not hearing about silver at parties or the local cafe yet, but am getting a few calls from old friends I talked to about silver 12 months ago.  You know, just to see how it's going.

    Keep up the good work.  You, Eric King and Jim Sinclair are providing a fantastic and valuable service.

    Cheers, Rad

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  22. Rad;
    Many thanks for sharing that very informative post with us all. that is fascinating.

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  23. Great post Dan! A sideways correction here would be great..silver is starting to see major excitement. Silver eagles hit $60 today on ebay!

    http://silverdoctors.blogspot.com/2011/04/real-price-of-silver-hits-60.html#more

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  24. I have an Engelhard 100 oz silver bar... should I sell it? Hold it?

    Should I buy SLV stocks now for a long term investment or should I wait to buy stocks later (if the value of silver goes down?

    I am not an investor - just a gal who happens to have a 100oz bar in this silver-bull-et market and some cash to invest.

    Just trying to figure out a good move to make...

    Your thoughts?

    Thank you!

    ElCapSFCA

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