Thursday, October 14, 2010

About silver - I.

I delay my writing about about silver every day, so I decided to nail down my thoughts in parts.

As gold rally is heating emotions and now in focus, there is less talk about silver. Personally I wrote some posts about silver and rose the attention of my readers about the upcoming breakout since august.
If you bought some silver miner or silver ETF in august, now you can see a nice sum on your account. As dollar collapses and masses buy more and more gold white metal prices just go up.

The main reason of my writing is to show you:
-Nature of silver and gold
-Take-off mode
-Possible potential of growth after ATH is beaten
-Exit strategies in Take-off mode

Nature of silver 

Silver, the white sister of gold is a strange metal. It sometimes behave as a precious metal, sometimes switches to be an industrial metal. What I need to stress is PM sector, especially silver is highly manipulated and volatile. I will repeat it every time in all my silver posts.
Personally I follow silver and silver miners  years ago. The most powerful growth in silver prices can be observed when both stock market and gold is in bull.
Let me show the following chart.

In the chart above we can follow when silver run together with gold, decouples from gold, behaves as an industrial metal. Also please observe it's inverse mirror to USD.
Silver is extremely volatile. In a few days it can loose 10-15% of it's value.
Please observe silver sometimes make long (half year) of consolidation before a breakout.

PM breakouts:

Prices of precious metals are mostly driven by psychology.
Two extreme emotions:
-What can I do with my dollar? It has less and less value, inflation is high, my money is not in safe. I buy precious metals
-What can I do with this piece of useless metal? I cant' eat it. I need cash to buy something anyway, so I sell.

Let's see what can silver do in case of ATH breakout.
I made a chart for you.

Let's zoom into the period of  january, 1st 2007 - july, 30th 2008:

As you can see, we have 5 phases at silver (gold is similar) take-off mode:

Phase 1: Long consolidation, boring metal. (sometimes finishing with a small crash, part of manipulation)
Phase 2: Silver performs a bull rally
Phase 3: Silver makes a correction (correct strategy is keep core position and add more)
Phase 4: Take-off mode (question is how to exit)
Phase 5: Crash (sad story)

As per moment silver (and gold) is somewhere in phase 2. I expect the same for silver now.
We almost have the same timing as well, and similar market circumstances and dollar fall as well.
Please observe the magnitude of corrections and crashes.

So it's easy to jump into the PM sector, but you need to have strong nerves staying with your bull and keep the large picture in mind and not let manipulation to kick you out from your core position.

The hardest point is phase 4. That period gives unbelievable gains, and driven by human psychology. There is no economy, no fundamentals, nothing behind, only human behavior.
Human greed spirals prices up and up to the skies while there is a day of recognition: there is no buyer on the other side.
Then the crash is fierce and huge. Silver can lose 25-30% in a few days.

The question is how to protect our gains, what is the exit strategy from PM sector?
We have several tools:
-Classic TA measures and indicators
-Classic Volume studies
-Computed, modern technologies

My next post will discuss that subject.

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