Mar 24, 2007
Much has been said and written about all the chaos that buffeted
the financial markets several weeks ago in response to the selloff
in the parabolic Chinese stock markets. The mini-panic's impact
on the US stock markets and commodities in general has been analyzed
from countless perspectives.
Silver, perhaps speculators' most beloved commodity, did not
escape this carnage unscathed. With the relatively tiny size
of the global silver market combined with considerable interest
among speculators leading to its extreme volatility, it should
not be surprising that silver sold off too. Speculators were
quite scared for a few days there and they liquidated everything
While it makes sense to be concerned about the selloffs in some
markets, in others it is totally unjustified. In general stocks
for example, very compelling arguments exist suggesting that
a major cyclical
bear may be starting to flex its muscles. If such an event
indeed comes to pass, many are wondering what it may portend
for silver and silver stocks.
Based on my studies of market history, I seriously doubt silver
has anything to fear from a general-stock bear. During the brutal
cyclical bear of 1973 and 1974 when the Dow 30 fell 45% for example,
silver rose 115% over this entire two-year period and soared
241% at best within it! Like gold, silver is an alternative investment
that shines the brightest when paper assets are struggling.
But although every contrarian understands this deep down, that
precious metals usually thrive when the general stock markets
suffer, it is easy to be overcome by the fear of the moment.
With silver plunging 14% within five trading days as this month
dawned, even some among the hardcore silver faithful experienced
doubts about silver's ability to weather a general-stock downleg
despite the metal's incredibly bullish fundamentals.
Endless tomes have been penned discussing these fundamentals,
describing how and why global silver supplies are unable to keep
pace with accelerating global demand and why this trend is likely
to persist for a decade or more into the future. But as it is
not the fundamentals that have spooked silver traders, but the
technicals, it is into the latter I want to delve today.
While you wouldn't know it from reading the wailing and gnashing
of teeth on Internet forums regarding silver's struggles of late,
this restless metal looks absolutely awesome today technically.
Not only did the mini-panic-induced selloff several weeks ago
not damage silver technically, but its tactical trends have rarely
The fantastic tactical silver trends unfolding today are readily
apparent in this chart. It encompasses the last 15 months of
silver action. As always, considering the silver selloff of several
weeks ago within its longer-term context immediately removes
any ability for it to generate fear. Silver is near a technical
point today that has nicely rewarded silver investors and speculators
who went long when it was approached previous times.
To gain proper strategic perspective
before considering recent tactical action, it is best to start
with the big picture. Since the dawn of 2006 the silver market
has been in three distinct states. The first, running until May
2006, was the culmination of silver's biggest upleg of its entire
bull market by far. From August 2005 to May 2006 it blasted 124%
higher. But roughly 5/8ths of this entire upleg's gains happened
from March to May, during its final parabolic ascent.
Parabolas have nasty reputations in the financial markets, and
rightly so. When a parabola happens at the end of a secular bull
market, like in the NASDAQ in 2000, it can take decades before
the old parabolic high is decisively broken. But thankfully silver's
parabola did not occur at the end of a bull market, but at the
beginning. With silver's fundamentals still so strong, its parabola
aftermath would be relatively limited.
On a sidenote, we have already seen a number of parabolas in
young commodities bulls that did not witness collapses afterwards.
Why? Because their global fundamentals were still dazzlingly
bullish even after the parabolas topped. If you are a Zeal subscriber,
log in to our private charts on our website and check out the
base-metals charts. Aluminum, copper, lead, nickel, zinc, and
uranium have all gone parabolic in recent years yet none have
crashed. Corrected, yes in most cases, but certainly not crashed.
Silver's incredible parabola witnessed a year ago also corrected,
and hard. In roughly one month ending last June, silver shed
35% in a hard correction. Even more interesting than the magnitude
was where the slide ended. When the dust settled, as you can
see above, silver was back down to where its parabola had started
in late February. Its entire parabolic ascent was completely
If you were long silver back then as a speculator, this couldn't
have made you very happy. Yet this hard correction was very necessary.
Way too much euphoria had been baked into the precious metals
by early May and a correction was inevitable and expected. At
Zeal we pulled
in our horns and waited for the coming correction to run
its course. While very unpopular at the time, we were right.
Silver's sharp correction that totally erased its whole parabola
also largely eliminated the excessively euphoric sentiment generated
by the parabolic ascent. In most markets I wouldn't expect to
see a new bull high yield to a deep interim low in just one month,
but silver is probably the most volatile major commodity market
on the planet. While it took gold
until October to shake out its own euphoria and bottom, silver
radically compressed this process and cleansed its own euphoria
The reason speculators so love silver is because it can move
so fast, in either direction. Extreme volatility can yield fantastic
gains in very short periods of time if traders are betting in
the right direction. But whenever speculative capital is deployed
in silver for short-term trades, traders must be ready to lose
money fast if they are wrong.
Silver traders live by the sword and die by the sword, especially
if leveraged via futures. After every major silver correction
in this bull, I've received sad e-mails from traders who were
seriously burned when silver turned on a dime and plummeted.
So if you are a leveraged speculator instead of a margin-free
long-term investor, please be careful in silver and realize your
capital can multiply or disappear incredibly rapidly.
But silver's apparent manic/depressive behavior mirroring that
of the consensus of its speculators does have benefits. After
silver bottomed in June its fledgling correction was already
finished. It did not need to go any lower because the euphoric
traders had already been driven away or slaughtered. Its current
upleg began the very day after it bottomed in June. Silver has
not looked back since.
Note above that since that June low, silver has carved a beautiful
uptrend with rock-solid support and resistance lines. Before
we delve into the tactical mechanics of this upleg, please consider
the sum of its efforts. Just one month ago, on February 26th,
silver had meandered 51% higher since June to within a mere 2%
of its dazzling bull high achieved in May! And this time its
approach was not parabolic, but a long, steady upleg built on
a solid foundation of patient fundamental-based buying.
The fact that silver has spent nine months climbing back up to
bull highs that it initially carved in just two should do more
than anything else to underscore silver's dazzlingly bullish
fundamentals. If the silver parabola of last year had been purely
sentiment-driven like the NASDAQ in early 2000 with no fundamental
underpinning, then silver would still be falling. But with silver
back above $14 last month without any euphoria or parabola, global
supply and demand truly justifies today's silver prices.
So strategically, what on earth is there to fear in silver? Even
on its worst day early this month when silver traders were duped
into believing that Chinese stock-market speculators are the
primary drivers of the global silver market, silver was still
up 27% to the day year-over-year! Over this same period of time
the S&P 500 rose just 7% and change. Thus silver investors,
long-term buy-and-holders, certainly had nothing to fear in early
March. At Zeal we started recommending physical silver as an
investment back in late 2001, at $4.20 per ounce.
But speculators caught in silver's fast 14% decline were certainly
scared. I received a surprising number of e-mails on silver over
the last couple weeks, which is why I wrote on it today. Interestingly
though, even for gunslinging traders the tactical silver trends
look excellent on balance. Considered in context there is nothing
In the beautiful new silver uptrend that has been relentlessly
powering higher since June, silver has rallied and retreated
three separate times now. The rallies lasted two to three months
each and carried silver from its lower support to its upper resistance.
The mid-upleg pullbacks, as is silver's style, were much faster
and usually only took a matter of weeks to drag the metal back
down to its lower support. The result of all of this was a series
of higher highs and higher lows, a textbook-perfect upleg.
The mid-upleg rallies ran 34%, 32%, and 21% respectively. The
latter didn't quite make it up to resistance as shown above so
I suspect it met an untimely demise as it was swept aside in
the Chinese-stock-market-plunge-induced mini-panic. When particularly
emotionally-compelling news hits the wires, it is not at all
uncommon for it to briefly short-circuit prevailing sentiment
and lead to temporary unforeseen swings.
After each of these mid-upleg rallies there was a sharp correction,
in typical silver fashion. Over the short-term silver prices
are so dominated by speculators that prices fall fast when these
speculators flee. The three sharp pullbacks in silver since this
upleg began ran 18%, 14%, and 14% respectively. And as you can
see on this chart, there was nothing out of the ordinary about
our latest sharp pullback. It had a similar magnitude and similar
duration to its two predecessors making it look quite ordinary
Now when any price swings unexpectedly and is apparently driven
by unforeseen news, the first thing speculators should do is
evaluate its technical impact within proper strategic context.
In silver's case several weeks ago all that happened is the metal
fell back down near support, just as it had done prior times
in this upleg, and then stabilized. Moves within a well-established
uptrend channel, no matter how sudden or sharp, are seldom worthy
And perhaps most exciting of all is where silver ended up when
it emerged from this minor scrum. Silver fell right to its uptrend
support line and remained above its 200-day moving average. The
former, of course, is where past silver pullbacks within this
upleg have ended and powerful new rallies have begun. If you
want the highest-probability-for-success time to add new long
silver positions within an upleg, it is when the metal is plumbing
support like today.
And within a far broader strategic bull context, the best times
to buy within an ongoing secular bull are when a price retreats
back near its 200-day
moving average. This is especially the case for long-term
investors who plan on deploying capital in silver for years.
Time your buying to occur when silver is near its 200dma as it
is today and your entry points on balance will be far superior
to haphazard buying timing.
With silver looking fantastic and very bullish over both the
short-term and long-term time horizons, now looks like as high-of-probability-for-success
time as any to add new long silver positions. If you are a conservative
long-term investor, you can call up your favorite coin dealer
and buy new physical silver positions. Our favorite type of physical
silver at Zeal has always been old US 90%-silver coins, bags
of 'junk' silver.
Speculators can consider going long silver futures and silver
futures options, as well as silver stocks and silver-stock options.
Personally I prefer the stock side of this game to the futures
side for a variety of reasons. There are many more stocks to
choose from, much more imperfect information, and a far greater
proportion of naÔve traders in silver stocks than in silver
futures. These combine to create more pricing anomalies that
we can exploit in elite silver stocks than exist in the singular
silver futures markets.
And of course silver stocks have fantastic profits
leverage to the silver price. Profits growth and hence ultimate
stock-price performance in the best-performing silver stocks
will utterly dwarf that of silver. They should even be much larger
than the gains won in futures using maximum leverage. Of course
there are countless company-specific risks in stocks that don't
plague futures, but bearing these is just the price of shooting
for truly legendary gains.
The biggest challenge with silver stocks is picking the right
horses to bet on. Not only do you have to have a good grasp of
where silver is within its tactical silver trends so you can
time your buys well, but you have to wade through oceans of information
to find the highest-potential plays in which to deploy. This
task is Herculean and intimidating, as there are literally hundreds
of publicly-traded silver stocks worldwide. Burning off the dross
takes an enormous amount of time and knowledge.
Thankfully at Zeal we are blessed to study the markets full time
to support our own personal trading, so we are constantly evaluating
stocks to find the very best fundamental prospects. We used to
keep all our fundamental research internal and merely use it
as the basis to recommend new trades to our subscribers, but
demand for pure fundamental research was high so we decided to
start selling it a year ago. We launched a new business line,
Zeal Reports, to formally offer our deep fundamental research.
Just this week my business partner Scott Wright finished months
and hundreds of hours of research into the world's silver stocks.
He profiled our 20 favorites out of the hundreds in the world
in a brand-new Zeal Favorite 20 Silver Stocks Research Report
now for sale. It is fascinating reading. These 20 silver stocks
are the elite population from which we are going to choose new
silver trades in our newsletters and buy into personally. Ranging
from large to small, investment-grade to hyper-speculative, they
all have excellent fundamental prospects and tremendous potential
to thrive with silver.
So if you are interested in understanding our favorite silver
stocks to bet on for the continuation of this upleg, which is
likely to accelerate considerably once enthusiasm finally builds,
please buy our new report today. It will save you hundreds of
tedious hours of wading through mind-numbing SEC reports, financial
statements, project documentation, websites, and marketing propaganda.
We did the hard work so you don't have to.
We also plan to recommend specific silver stocks out of this
report in our acclaimed monthly newsletter in the future as long
as silver's technicals remain favorable for buying. Please subscribe
today if you don't want to miss the next stage of this silver
upleg, which should be the larger one if long-lost silver euphoria
The bottom line is the tactical silver trends look fantastic
today, despite the turbulence of several weeks ago. Silver is
not driven by the fortunes in the Chinese stock markets, but
by its worldwide supply and demand fundamentals which remain
incredibly bullish. Any setbacks within such a fundamental backdrop
will only be temporary, great opportunities to add new long positions.
Since silver is such a relatively tiny market, its ultimate gains
in this secular bull will probably far exceed gold's just as
happened in the 1970s. By adding long positions whenever silver
is near well-established support zones as well as its 200dma,
such as today, both investors and speculators stand to reap truly
legendary gains by the time this bull ultimately matures.
Adam Hamilton, CPA
March 23, 2007
Thoughts, comments, or flames? Fire away at firstname.lastname@example.org. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!
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