Friday, May 20, 2011

Silver at the Fork in the Road

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

In the past few issues of my Street$marts letter and on Facebook and Twitter, silver has been a popular topic.

 If you are not following my daily comments and would like to, please click on the Facebook and/or Twitter icons at the bottom of this post.  When we left silver not long ago, I showed a series of charts on how bubbles are built and what they look like. 

I also explained why they are so difficult to profit from, using Keynes' line that the market can stay irrational longer than you can stay solvent.

From the 2008 bottom.  $9 to $50. What do you think? Bubble?
Today, we can easily see below that silver was decimated from $50 to $33 in a little more than a week.  Has the bull market ended?  Is silver headed back to single digits?  It's still too early to tell, but the bull market has been seriously wounded.

It was certainly a back breaker for the bulls as the Chicago Merc, where silver trades, repeatedly raised margin requirements to help put a damper on rampant speculation. And contrary to popular belief, there is no anecdotal evidence that raising margin requirements on commodities causes prices to decline.  Volume certainly slows and perhaps volatility recedes, but price is like water. It finds its own level. 
Conspiracy theorists are out in full force, believing that this is all part of a grand scheme by the government to confiscate gold and silver holdings of American citizens like FDR did in 1934. If that's even remotely true, why wasn't the margin requirement on gold raised as well? What a far cry from a few weeks ago when that same group (or not) continued reporting that JP Morgan was short the equivalent of all the silver on earth and they were being squeezed to deliver the metal. You can't have it both ways!
As a student of market history, it's helpful to be able to compare current action with that of a similar period in the past. The next chart is from 2006 and shows a similar collapse in silver after a meteoric rise.
At that time, I remember believing that the gig was up and silver was toast for a long while. How wrong I was as the metal digested for more than a year before blowing off to the upside in early 2008.

I think the best way to ascertain where silver is now is to see how it behaves in the coming weeks. After a 34% hit, buyers should support the metal between here and $30. If we begin to see stability and digestion, I will argue that the bull market is not over. However, if we see more selling, especially into rallies that result in lower lows, I think the bull market will be dead as you can see the two possible paths below. The red arrows indicate that a new bear market began and the greens ones indicate a multi month digestion before taking off to the upside again above $50. 

 FYI, I will be on CNBC’s Squawk on the Street at 9:35am on May 31.
Feel free to email me with any questions or comments at

Until next time…
Paul Schatz
Heritage Capital LLC
Follow us on Facebook at and on Twitter @Paul_Schatz

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