Is Silver a Short-Term Buy Again?

I want to focus on longer-term matters here most of the time, but it's also important to stay on top of trading calls I have made on the record. Thus I want to provide an update on silver, as I posted "Silver Is Probably Overpriced" on June 2. At that time, the ETF known as SLV was at $36. I thought that was a brave call, given that silver had recently plummeted and looked oversold to many.

That bearish post came from the longer term context of several bullish mentions on silver when it was around $20/ounce last year, which call I did not reverse until this spring. A longer-term context regarding precious metals comes from my market calls at econblogreview.blogspot.com, where I was speaking favorably of gold as an investment beginning in spring 2009, with one well-timed "sell" call at the intermediate-term top in early December 2009 and then a buy-back call. I always thought silver was too speculative to bother with until last summer and thus rarely commented on it till then. But after QE 1.5 began in August last year, my views changed a good deal and I thought, correctly as it turned out, that the greater volatility of silver than gold had suddenly become a good thing for investors.

Over the last two days, I have seen evidence that the "smart money" on the Comex futures market has now turned relatively bullish on silver as of mid-week last week, just as silver was bottoming for the week. Silver has now formed a 2-month horizontal base at current level. It is off about 8% from June 2. It is off by about 33% since its highs of late April. Over the last several years, these 1/3 off sales on silver have all been great entry points for traders, the one exception being the liquidation phase of all markets in summer-fall 2008. Even then, silver fell one-third from its then-recent high, rested a couple of months, then fell another third in the panic in the fall (all ratios are approximate for verbal convenience). That final fall, to under $10, may prove to be its all-time low. Even if one had bought too soon after the first 1/3 off sale, around $14/ounce, and grimly held, and kept holding till now, one would have about a 36% annualized total return from that $14 price. This compares with a few percent a year from stocks from those pre-Lehman days.

In order to look at long term valuations and be sure they were in line, I looked at prices of silver, gold and oil 55 years ago. Since gold did not trade freely, I adjusted its price to $40/ounce from the official $35. The rationale for this was that FDR raised gold from $20.69 to $35 in 1934, and the consumer price index rose far more than that large percentage increase between 1934 and 1956. So I think that $40 is probably too low for what gold's free market price would have been in 1956, but there's no way of being sure, so I think I'm being conservative using $40.

In any case, since 1956, silver is up 6.8%, gold 6.8% (using $40), and oil 6.4%, all on a per year basis. Not a dime's worth of difference between them. And I suspect that 6.4%-6.8% is also all you need to know estimate the true price inflation rate since then as well. So, there's nothing to suggest that silver is overpriced on a very long-term basis.

So, my evolving views on silver are that short-term, it may well have now fallen too far/too fast so that I am canceling my bearish call, and that long-term, it remains a sound investment with periodic great selling opportunities when the crowd gets really excited and great buying opportunities after plunges. I am however concerned about the intermediate term, meaning a period of months, and in fact I am not bullish on any commodities right now on a multi-month time frame except for trading opportunities. (Of course multi-month views can change as prices and facts change.)

There is no chart here, deliberately, as different people look at charts different ways. However, I do look at charts a lot. If the 2-month base upon which silver is precariously placed (and which is pointing bearishly down) breaks down, I expect that a lot of determined selling will come in and will take aim at the next support level, which is ill-defined but appears to be in the high $20s up to $30.

Copyright Long Lake LLC 2011

Please note that as usual these are my personal thoughts and not investment advice, and again that I am long silver and may take any or no action to increase or decrease said holdings at any time.