Why Silver's Pause is a Good Thing

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By Martin Tillier

“No sustainable move is in a straight line.”

Silver has been on a tear, rising from a fix of $27.08 at the end of June 2012 to $34.65 on the last trading day in September (the 28th).

A 27.9% increase in three months is not to be sneezed at, but over the last two weeks it looks like the move has stopped. The metal fixed at $34.71 on September 14th and has moved sideways since.

If you hold silver bullion and are getting a little nervous, or if you are wondering if you missed the opportunity, I will remind you of an old market truism.

“No sustainable move is in a straight line.”

A look at the 2 year chart for silver shows why I believe this is a pause in a sustained rise, rather than a turning point.

 

The last time silver rose rapidly was at the beginning of 2011. At that time the drop following the rise was dramatic. The chart for that period looks very different to now, however. There was an attempt at a slow down around $34.50-$35/oz, but after a couple of days the upward climb resumed.

Steep, virtually uninterrupted moves like this are usually indicative of a mini-bubble and are often driven purely by speculation. This particular bubble did burst when the commodities exchanges raised margin requirements six times over a two week period, from $12,825 on April 26th 2011to $21,600 on May 9th, an incredible 68% increase.  

This made speculation on silver futures contracts far more expensive, causing many to sell rather than come up with extra cash to maintain their position. The longer silver pauses at these levels, the less likely a repeat of that scenario looks.

Which is a very good thing.

With silver having stayed around the $33-35/oz level for a couple of weeks, and without any significant correction, it would seem that there is still real demand underpinning the price, rather than the move up being purely speculative. This steady demand is hardly a surprise to those that follow the metal. The average smart phone utilizes 0.35g of silver. Sales of the Apple (AAPL) i-Phone 5 alone were approximately 5 million units in the first week, representing demand for 61,728 ounces of silver. Add in demand for other phones, tablets, solar panels and other electronic devices and you begin to understand why I believe that this move is driven by fundamentals rather than pure speculation.

The exchanges have a duty to act should they perceive a speculative bubble, but not in the event of a fundamental shift in the value of a commodity. Given that, an orderly, steady move back to levels above $45 is unlikely to precipitate any action to depress prices. Once that level is achieved and there is no reaction the way is cleared for a break of $50, forming a new base for support.

In short, if you feel you have seen this before and are wary at these levels, think again. This is not the same pattern.

For more information about owning physical silver: http://preciousmetalssecrets.com/invest-today/



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities , Futures , Technology

Referenced Stocks: AAPL

Martin Tillier


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