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Silver's Final Bottom Is Not Yet In

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Silver has been underperforming recently, but not as extremely as is usually expected during a major bottom.

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What happened on Friday, April 12 and Monday, April 15 on gold and silver markets looked like a gigantic earthquake – a drop of about $200 (13%) for the yellow metal and almost $5 (18%) for the silver metal. There has been a lot of hyperbole. We even heard it said that a move of that scale would statistically only be expected "once every 4,776 years." Going even further, John Kemp of Reuters calculates that, based on a normal distribution (by the way, market returns are not normally distributed), movements like this can be expected once in every 500 million trading days, or two million years. Sounds far-fetched?

There have been plenty of attempts to explain the cause of this enormous plunge. China's economy grew "only" 7.7% in the first quarter, undershooting market expectations for an 8% expansion. China is the world's second largest buyer of gold. There were concerns that the US stimulus may be cut short since minutes of the Fed released just before the big decline in gold prices showed some officials were interested in ending the QE program this year. Another theory posits that since the new Japanese central bank governor promised to re-inflate the Japanese economy, Japanese government bonds (JGBs) have been on a wild ride. When investors in volatile assets are asked to put up wider margins they often sell assets they are holding. In this case, CME's decision to raise margins for the entire precious metals sector is another bearish factor for the short term.

While what happened looks disastrous, my firm doesn't think that this means the end of the great, secular bull market in precious metals. Bull markets have a parabolic stage when everyone is in a frenzy to get in and prices go up in a straight line. We have yet to see that spike.

Furthermore, we don't see any changes in the fundamentals for gold and silver to make us think the bull market is over. There is still large unemployment, ballooning national debt, currency debasement and currency war, eurozone problems, QEs, etc. We like gold and silver for the same reasons we have liked them for the past decade.

The fundamentals are intact which 'forces' silver to rally in the long run but let us now turn to today's technical portion to see whether recent events have marked the final bottom in the white metal or rather further declines are to be expected – we'll start with silver's long term chart (charts courtesy of http://stockcharts.com).


Click to enlarge

We don't see the same corrective price action as we saw for gold – the yellow metal rallied for seven out of the last eight days. Silver prices declined this week, except for a quite substantial move up on Thursday.

Overall, declines simply continue here (there was a small pullback within the 2008 decline as well); gold prices corrected quite a bit and silver did not. If this underperformance continues and gold prices move lower by $100 or so, the implication appears to be that silver will decline sharply to perhaps the $18 level or so. This price level is created by the July local bottom and the declining trend channel (parallel, green lines on the chart above), and the price level where the huge 2010 to 2011 rally began.
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No positions in stocks mentioned.
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