Silver Investing: Are Silver Bulls About To Stampede Again?

| October 27, 2011 | 0 Comments

Long-time readers know I’ve been bullish on silver for years now.

In fact, in mid-2010 I pointed out a promising technical pattern in the subdued silver market.  It was a pattern that suggested a big move for silver prices was right around the corner.

What happened next was truly extraordinary…

Silver shot from a mere $18 an ounce to nearly $50 by April 2011… a stunning 170% leap in just eight months.  It seemed investors couldn’t get their hands on silver fast enough.

But then the Chicago Mercantile Exchange (CME) dumped cold water on the red-hot rally.

They felt speculation was getting out of control in the relatively tiny silver market.  So they squashed silver’s spectacular rise by raising Comex margins through the roof in late April.

The increased capital requirements quickly sent silver prices back down to earth.

And now, here we are…

This once hot market has been sitting in the penalty box for months now.  Ever since the CME raised margins, things just haven’t been the same.  Volatility is much lower and so are prices.

And that leads me to the question on every precious metal investor’s mind…

Has silver seen its best days?

Some analysts suggest the shiny metal could fall back down to the $25 area… a 25% drop from current levels.  They see “soft industrial fundamentals” and “easing global investment demand” sending silver lower in coming months.

I completely disagree…

For the life of me, I can’t figure out where these guys get their information.  If anything, silver investment demand is set to strengthen in coming months.

Why?

China and India are suddenly moving towards a more dovish interest rate stance.  After months of tightening, recent data suggests those country’s central banks may have tightened too much.  And now, they’ll need to loosen their purse strings to keep economic growth intact.

What do India and China have to do with silver?

These inflation-ridden countries import spectacular amounts of the illustrious metal.

In fact, India is the number one silver importing country in the world. In 2010, they imported just over 3,000 tons… double their 2009 imports.  And in 2011, Indian precious metals analysts are expecting to tack another 30% on top of 2010’s hefty import number.

So it stands to reason, if India’s central bank eases their monetary policy- silver demand will likely pick up even more than analysts are expecting.

The same holds true for China.

Clearly, silver still has a lot going for it on an investment demand basis.

But as many of you know, I also lean heavily on technical analysis before making an investment decision.  After reviewing a long-term chart, I think silver’s setting up for something interesting.

This long-term weekly chart shows this summer’s big silver price drop is merely a consolidation in a long-term uptrend.

The staggering late 2010/early 2011 rally had to slow at some point.  And that’s what silver has been doing for the past six months… catching its breath.

But it won’t take much for silver to continue sprinting to the upside…

In my opinion, this summer’s silver slowdown is actually a huge flag pattern in the works.  And after a market breaks out of a flag pattern, it usually continues in the direction of the original move.

In silver’s case, that’s UP…

As you can see, silver’s trading at the bottom trend line of the flag right now (green line).  If I’m correct, silver should trade up to the $38 area in coming months.  And at that point, we’ll need a break above the red trend line before silver can really rally like it did in early 2011.

Now let me be clear, if the situation in Europe takes a turn for the worse, all bets are off.  Silver will likely fall along with everything else.

But if a European disaster is averted, which I think it will be, silver could book some hefty gains as we roll into 2012.

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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