Investors: Four Must-See Charts On Silver (SLV, AGQ, ZSL, SIL, USV, DBS, SIVR, PSLV, GLD)
Sean Brodrick: The sell-off in silver is going on, and we aren’t done yet. But where will silver go? Are there better investments in precious metals or in mining stocks?
Today, I want to show you four charts I’m watching; charts that you should be watching too.
First, here are some important things to remember:
• The Chicago Mercantile Exchange has raised margin requirements on silver futures five times in two weeks. While margin requirements must go up when prices go up, five times in two weeks looks like a sign of either incompetence or some other agenda — that is, there are some big banks caught with their pants down and massive silver shorts exposed for all to see. Their effects to cover this up are as comical as they are ham-fisted.
• Disappointment over silver’s failure to breach the psychologically important $50 level last week is also a factor. The hot money is moving on to other things for now. This leads to a correction, a normal and necessary part of any bull market.
• And then there’s simple profit taking — many people bought silver at much lower levels, so they’re locking in gains. You know what, we did that too, in Red-Hot Global Resources and my recent report titled, 11 Gold and Silver Champions for 2011. And there’s nothing wrong with taking profits.
Still, the fundamental fact is that both gold and silver are in big bull markets. Until that changes, pullbacks and corrections are buying opportunities.
Now, let’s get to those charts.
Chart #1: Silver’s Short-term Support
(For an updated version of this chart, point your web browser here: http://bit.ly/iqE8bo)
Any of these levels is a good place to buy silver. But A) I wouldn’t buy all at once and B) I would wait for silver to shift into an uptrend before putting any money to work.
See, any of these levels could be short-term support. But there’s nothing saying they MUST be support.
Now, what if you’re a bit more bearish? Well, then you might want to chart support levels from silver’s big breakout last August. And that brings us to our next chart …
Chart #2: Silver’s Longer-term Support
(For an updated version of this chart, point your web browser here: http://bit.ly/ljQ0MV)
If you’re thinking longer-term, silver won’t come to its first level of support until the 36.50 area. And it could even go under $30 and still find support. Wouldn’t THAT be an opportunity?!
It probably won’t come to that — we probably aren’t that lucky. Why? Because of the action we’re seeing in silver miners. Take a look at this next chart …
Chart #3: Ratio of Major Silver Miners to Silver
(For an updated version of this chart, point your web browser here: http://bit.ly/iQy1dj)
This chart shows the Global X Silver Miners (NYSE:SIL) divided by the iShares Silver ETF (NYSE:SLV). When this ratio is climbing, as it did through the end of last year, silver miners are getting more expensive compared to the metal. That’s what you’d expect because silver miners are leveraged to the price of the metal.
However, the normal relationship was thrown off track early this year, as miners started getting cheaper in relationship to the metal. And in April, the miners plunged — fell apart, really.
I believe the decline in the first part of the year was the result of worries of rising costs being priced in to the miners. The April plunge came as traders anticipated a peak in silver prices, which would mean miners would be squeezed by both rising costs and falling prices. And that’s exactly what’s happened.
However, look at the far right side of the chart. It’s still early, but it looks like the silver miner/silver ratio may be bottoming. We’ll need confirmation in the price action of the stocks themselves, but it looks like most of the bad news may be priced in for the major miners. If so, we may be coming up to a real buying opportunity.
As for silver itself, I think it’s going to have to do some real base-building before pushing through $50. This could take some time.
But there’s another metal that is starting to outperform silver. And that’s the subject of our next chart …
Chart #4: The Gold-to-Silver Ratio
(For an updated version of this chart, point your web browser here: http://bit.ly/jhta3s)
This is a chart of the gold-to-silver ratio, or the price of gold divided by silver. It started plunging last year, and recently fell as low as 29.51. That’s too far, too fast. The gold/silver ratio is now rising, which means gold should outperform silver. This ratio could rise to the 46 level before running into any real resistance … and it could certainly go higher. It was higher for years.
At the same time, we could see gold miners outperform silver miners. So, IF miners are bottoming, gold miners may be the next big investment.
It doesn’t have to be that way. After all, gold’s outperformance could just mean that it falls less in percentage terms than silver. Maybe the bears are right, and silver and gold are both in for major haircuts.
But I don’t think so. Central banks are still buying gold like crazy — the Central Bank of Mexico just bought $5 billion worth of gold. And the industrial users of silver will probably start snatching up bargains in the metal sooner rather than later.
So, pick your entry points carefully and don’t put all your money to work at once. But be prepared to buy when others are selling, because, longer-term, your gains could be quite extraordinary.
Related Tickers: Sprott Physical Silver Trust (NYSE:PSLV), ProShares Ultra Silver (NYSE:AGQ), ETFS Physical Silver Shares (NYSE:SIVR), PowerShares DB Silver (NYSE:DBS), ProShares UltraShort Silver (NYSE:ZSL), UBS E-TRACS CMCI Silver TR ETN (NYSE:USV), Global X Silver Miners ETF (NYSE:SIL), iShares Silver Trust (NYSE:SLV), SPDR Gold Trust (NYSE:GLD).
All the best,
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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