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This week saw the
expected breakdown of the price of silver as I had warned might
happen when I wrote about it in the prior week. We saw the technical head and shoulders topping
pattern come to be which resulted in a barrage of selling once the neckline
was breached.
In this updated chart we see the breach and we see
the spot price of silver rally back towards, but not piercing, the neck line.
This means that unless we see a significant breach north of the neckline, the
intermediate trend for the spot price of silver remains down.
 
I've got until January 21 expiration on the open put
position on the SLV so I have time to watch the market play out. My downside
target for silver is $26.00. If it is breached, then $25.00 is key
psychological support. If $25 is taken out then we could very realistically
see $22-20 silver in no time. Watch the price of silver closely. if it really breaks down then it won’t be long
before we see it breaking the $20.00 level which will be very very bad technically and could send the metal tumbling
farther into the teens.
Usually on a head and shoulders top, the down move
off the break off the neckline is equivalent to the spike. The
"head" top was $35.70. The neckline is $30.65. Therefore, if we are
to get a downside breach equivalent to the intermediate ("head")
top, this places my downside at $25.65 - $26.00 (spot price of silver).
Friday’s rally, as I pointed out above, did not break the neckline and
was on much lighter volume than one would expect if it were really a key
reversal.
The breakdown in the precious metals sector last
week is important and is not one to scoff at or laugh off. Don’t chalk
it up to “manipulation”. We are really on the edge of a severe
deflationary environment that can be viewed as the start of a bear market,
one that might drag the precious metals into it. Investors need to respect
the fact that what may happen in short order is going to be much worse than
what we all witnessed in 2008-2009 because unlike then when a bunch of banks
went under, we are on the verge of seeing nations go broke along with banks,
hedge funds and investors. Silver AND gold will not be spared.
We pointed out that the US dollar was on the verge of a massive rally and that the
Euro was about to crumble. Not long after that, we saw this take place.
Despite what you are hearing or have been made to believe, keep in mind that
the world is not running to gold during this event. As evidenced by
gold’s decline and by the dollar’s rebound, investors and those
that need cash are flocking to the US Dollar. Cash, in particular the U.S.
dollar is reigning supreme at this time. It is troubling that in the face of
all this…with the obvious in clear sight for all to see, there are
still some that are very selective in their analysis and refuse to accept the
very real possibility that we are witnessing a massive deflationary spiral
that will effectively kill the silver and gold bull.
I don’t want investors and readers to be
blinded to the real possibility of seeing what I am warning about happen. If
gold and silver rally then I will be as happy as the next gold and silver
investor. However, we can’t assume that anything will bounce back. The
world didn’t just wake up one day and realize that silver was an
investment tool. Remember that much of silver’s massive move came
during a relatively short time frame in the earlier part of this year.
This is not indicative of a bull market but in hindsight is looking more like
rampant speculation. What is the fair price for the white metal? What is its
real value? Like anything else, it is only worth what the next guy is willing
to pay for it. However, if the next guy is broke, then it really won’t
matter will it?
Unlike gold which has been on a steady climb for the
better part of 10-11 years, this did not take place with silver. We
can’t ignore this. While we capitalized beautifully on the run up
when I wrote that investors should buy silver on the cusp of a major move
when it was below $25.00 in late 2010, we did had that major move and the
chart is signalling that that move ended abruptly
near the top of $50.00. As much as I hate to say it, the prudent thing to do
is to go back and revisit my thought process and adjust it based on what I have seen and
based on what is happening.
Sure…banks are broke, as are governments and
corporations. However,
the average citizen is also loaded with debt and those people don’t run
out and buy physical silver or gold if they are struggling to pay their
mortgages, keep their jobs or put food on the table. Where is the MASSIVE demand for
physical silver going to come from? The industrial use for silver
has always been known but that never caused the price for physical silver to
spike like it did over the past year and a half. The last major move in
silver during the Hunt brothers era was not because of safe-haven demand it
was because of a massive speculative attempt by the brothers to corner the
silver market on margin. If we are going to argue that the industrial use for
silver is what will keep the price high then we must also acknowledge that
industrial slow-downs will bring down the price.
Many of you have not been reading my blog long
enough to know that I have always been a staunch gold and silver bull. This
fact though doesn’t mean I wear blinders to what is going on in the
rest of the world. We must all keep an open mind and an open view and
sometimes it means going against what we have always believed, especially in
the face of the obvious data we are presented with.
Next week should give us clues as to which direction
the metal wants to go. One thing is for certain though…this event is
not a part of any manipulated event to bring down the price of silver. If
silver breaks to the downside it will be because a deflationary event is upon
us and margin calls and the scramble for cold hard physical cash will be upon
us. Despite all the “death of the dollar” doomsayers out there, the
reality is that the U.S. dollar is on the verge of a major rally and that
same dollar never did die as many called for.
Keep an open mind and stay prudent. I’ll
update the situation as it plays out.
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