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Silver Ready for Next Leg to the Downside

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Silver-investing-can-be-a-wild-ride

It was April 2011, and Silver had just touched $50. An amazing move from sub $10 in late 2008. Analysts and speculators alike cited many reasons for the 500% move. First it was the disparity between the price of Gold and Silver, which was near historic highs. Then it was the weakness in the US dollar, which had just just touched 73. Next was the rise of the SLV ETF, which created hundreds of tons of Silver demand during the Spring of 2011. With the Eurozone debt crisis gaining steam, folks also used Silver as protection from possible currency and market fluctuations, ie. a safe haven from risky assets. Others said it was simply supply and demand. And then of course there was the realization by many, that policies put in place by Central Banks around the world, would cause massive inflation.

While Silver was hitting highs in 2011 not seen since 1980, the Federal Reserve was nearing the end of its second round of quantitive easing. An unorthodox program that had folks buying Gold and Silver to protect themselves from possible inflation risks associated with the Massive Bond and Mortgage-Backed Securities purchases. Little did they know, that program would turn into QE-infinity a few years later, and the Japan would add fuel to the fire with its own massive easing program.

It does not take an economist to figure out that when Central Banks print money, inflation should follow. Buying Gold and Silver ahead of that move seemed like easy trades. And easy it was, as both commodities yielded huge returns for investors from 2009 until 2012.

But things have started to change recently. The concerns of a collapse in the Eurozone in 2011 are replaced by promises of the ECB to do whatever it needs to do to preserve the Euro. The USD is much stronger then in 2011, and the feared runaway inflation event has not happened and possibly the reverse could be happening, as their are now concerns of possible deflation. The U.S. economy is showing signs of recovery. The global financial collapse that was coming... the one that had folks clamoring for safe haven assets, is not happening. So WHAT HAS CHANGED SINCE 2009 to warrant the current 250% price increase in silver?

Cumulative inflation since 2009 is under 10%, meaning the price of silver adjusted for inflation should near $10. So is it demand that adds the extra $14 to the price of Silver since 2009? One would think so, as the Silver Coin has been met with record demand this year. But to me that is just typical of what this market does to folks. The ones who watch the commercials and TV ads entitled  "With Gold at Historical Levels, now is the time to get in before it goes to $2000" , promising huge returns for those who are in early on this Gold and Silver rally.  And unfortunately those will be the folks holding the bag when Silver is back under $10.

So in summary, we think Silver is ready for the next leg to the downside. One that will have Silver near $20, and some folks on the verge of more margin calls. With inflation not an issue, The Eurozone not in collapse, and with Silver still up 250% from its 2009, we think this is the time to grab some puts for the carnage.

Check out our Monthly chart for Silver and see for yourselves. And while scratching your head wondering why Silver is dropping again over the next week or two, ask yourself what has changed since 2009...

SILVER 5-6 - small

 

The Case for GOLD

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I was talking with Jimmybob late yesterday and we both commented on the early flat start to most retail stocks, namely AMZN in spite of some rather negative news out from the holiday shopping season. AMZN also had technical problems on Christmas eve that likely helped with yesterdays 4% sell off. AMZN and many retail stocks weren't down big at the open. It was a sanguine open for most of them until the selling started up later in the morning. A delayed reaction, and one that would have been quite profitable had you jumped in early. The AMZN $250 puts were as low as $.60 before soaring over 400%, the $255 puts $1.20 before hitting $7.00+ later in the session. The writing was on the wall, yet the market didn't see it at the open.

I think the market right now is missing some rather large writing on the wall right now. Central banks are printing money faster and more furiously than ever before. The Japanese are embarking on a massive scheme with the direct goal of devaluing their currency. Unlike the U.S., who have said they want a strong USD while printing fake money the last four years, much like telling your wife your love her and then screwing around with a different woman every night, the Japanese have openly stated they want a weaker yen.... And its working. Its difficult to strengthen your currency but anyone with a Kindergarten education can hit the print button at the central bank ultimately unwinding countless years of sound central bank planning.

We have Bernanke and the Fed printing massive USD, the ECB printing Euro's, the UK printing Sterling, and the Japanese printing Yen, and each central bank is backing this freshly minted currency with absolutely nothing. Zero, Zip, Squat. Imagine playing a game of monopoly and the banker takes reams of paper and starts making more and more and more fake monopoly money. What happens? At some point the market value of Boardwalk goes from $400 to $4,000. Baltic Avenue goes from $60 to $600. In this real life game of paper money printing the central bankers are hell bent on turning the slum property of Baltic Avenue and making it valued like a 50 room mansion. They are artificially increasing the money supply with the hopes of raising asset prices and its being done on a global scale. For anyone who knows anything about the markets, this is indeed scary times... and when the financial markets get scary its time to buy something that can't be printed out of thin air. Something the central banks can not manipulate openly, and that is gold.

We've seen gold sell-off recently in spite of these new massive money printing schemes from the FED and the Japanese. It is like yesterdays retail action, a delayed reaction. Gold is lagging, its struggling right now, but I think it will rally into 2013 and hit new highs next year.

As gold rises over the coming weeks and months many will be looking back at the recent sell-off of gold and wonder why they weren't a buyer here. As I write this post pre-market on 12/12/12 gold is down again with GLD at $160.44.

I like next weeks $162 calls at $.60 this morning if I can get them and I am long the January monthly $162 calls.