Silver: Buy weakness and enjoy the strength

It was a week like we haven’t seen since the beginning of the crash in early 2008, but this time it was mostly in the commodity sector. Many stocks did get hit hard, as well as the major indices, but the real damage came in commodities, especially silver.

It’s not really that it wasn’t warranted, but the swift and blatant nature of the move is suspect. If I didn’t know better I’d even say the move in silver qualifies as manipulation. Thank god I know that NEVER happens in markets. Sorry for the sarcasm.

I have never seen a commodity falling and still have its margins risen. It may have happened, but I don’t recall ever seeing it.

Normally if the powers that be at the CME think a market is a bit too frothy they may raise margins to reduce speculation. This act just increases the amount of money a trader has to lay down initially in order to trade a contract in said commodity.

Silver has had its margins raised numerous times during this latest run that began in August 2010. Every time we’ve seen a correction. Mostly they’ve been sharp and relatively shallow before moving back into new highs.

This time however, after each correction the CME raised margins again, and again, and again, for a total of five times in only 8 trading days. The last margin increase was announced late in the week and will take effect on Monday May 9th.

If this were a fight, it wouldn’t be fair. It would be like hitting your opponent with a knockout punch. Letting him fall then get to one knee before hitting him with another and another and another. The fight would have been stopped by observers after the first and certainly the second punch. But no such luck when the CME is involved.

There has been talk and questions about just how the CME determines when to raise margins, most of it revolving around some sort of calculation. It’s obviously a subjective decision as nothing should ever be hit when it’s down this much over and over.

I don’t know who’s paying the guys over there but some sort of backroom dealing is surely taking place. Will it be investigated or punished? Don’t kid yourself.

In fact the talk has revolved around investigation speculators. I think investigating the CME would be the more appropriate move, but who am I to say. I just watch and trade the markets, not make them.

In fact the talk has revolved around investigation speculators. I think investigating the CME would be the more appropriate move, but who am I to say. I just watch and trade the markets, not make them.

You’d get more jail time if you robbed the old lady next door of her piggy bank while she was out of town than if you just robbed wise investors who see the merit in silver of billions of dollars in only a few days.

In the world of ultimate fighting silver has been trying to tap out for the last $10 but the referee/CME is ignoring them putting silver/the fighter in great harm. Although I’m not worried for silver’s sake. Its underlying fundamentals haven’t changed, it’s only gone on a blowout sale, and it’s likely to be very short-lived.

Make your calls and place your orders now. We may see slightly lower prices so perhaps place half your order now and the rest in a few days or a week is best, but this gift is much better than the one you’ll get this coming Christmas as it will keep on giving and giving for years to come.

This is one of those rare times in market history when taking out a second mortgage and raising as much cash as possible to get into this trade is warranted. Of course I’m joking about mortgaging your home, but only just barely.

During secular bull markets, things tend to move two steps forward and one step back. While it’s been extreme, this is all it has been. If I told you one year ago silver would be at $36 an ounce in a year you probably would have jumped with joy.

Ignore the volatility. Buy weakness and enjoy the strength. We have much, much further to go on the upside with both gold and silver.

Let’s look at a few chats and assess the damage.

Gold fell 4.36% for the week which is a much larger move than we’ve become accustomed to. Rest assured though that as the secular bull market continues volatility will increase as well. Moves of well more than 4% will be seen on a daily basis. Holding the physical gold makes sitting through this volatility much easier.

As you can see gold is holding the uptrend line very well and it’s also only retraced to the 38% Fibonacci level. While it was swift, it’s pretty well textbook. In fact even a further move to test the 50% Fibonacci level at $1,441 would be warranted.

As I mentioned above, this would fit perfectly with the two steps forward, one step back flow of bull markets.

As I say, buy weakness and enjoy strength. This is weakness.

As for the GLD ETF which I track for volume indications, it’s all out of whack, or perhaps I should say, it’s whack!

Volume in the 25 million per day range used to signify tops and bottoms relatively well, but now that seems quite low as we saw this level was hit everyday this past week with Thursdays volume over 50 million. Volume isn’t really telling me much right now other than Thursdays’ low so far does look like a bottom with the spike touching and holding support areas and volume being absolutely massive.

Right now I feel comfortable calling a tentative bottom for this move with a potential for a spike low to the $1,441 area, likely on an intraday basis.

Silver didn’t fare quite as well as gold as you know and it was hit to the simply stunning tune of 25.63% for the week. Wow!

Silver was smashed through support levels and all Fibonacci retracement levels. The only good thing is it held the 100 day moving average on a daily basis. To be honest I’ve been warning readers and subscribers to avoid trading silver as it was in a bit of a manic phase lately.

Thankfully subscribers did avoid the carnage as it occurred so quickly that it was nearly impossible to comprehend let alone trade.

A bottom could be in but in reality I think we may see a further move to test the $30 area where we see some real support.

I’d say you could begin to buy physical silver here with the hopes of filling your quota a bit lower but at the same time accepting that you may have to pay up.

I am not yet willing to try and trade this, nor add to my already heavy weighting of physical silver, although I may decide to convert some gold into silver in the fairly near future.

It’s always a very personal choice just how much physical to own and in which ratio, in term of gold to silver. I always tell subscribers to do what makes sleep come easy.

As for the SLV ETF and its volume, its been absolutely off the charts. Nearly 300 million shares traded hands Thursday and basically 200 million or more everyday for nearly two weeks.

Thursday’s spike low in price and spike high in volume could be the low, but this market is still what would be termed a falling knife. I prefer to keep my fingers at this time.

I spent last weekend in the great city of New York. Unfortunately I really only had one free day as the rest was occupied by business which I thoroughly enjoyed as well. In hindsight I should have stayed down for the whole week as the weather was warmer and the markets would have been better ignored.

I happened to be walking back to my hotel very late Sunday night, actually quite early Monday morning when I noticed a moderate crowd up to some tomfoolery in Times Square. At the time I had no idea that Bin Laden had been killed and that’s what they were celebrating. I thought Bin Laden had been killed years ago!

It just strikes me as curious that they can’t seem to get their story straight, won’t release photos and have buried him at sea before even announcing the news. Something sounds fishy about it to me.

And really was he that big a threat nowadays anyhow?

It all just seems so convenient.

With QE2 coming to an end in under two months perhaps a good commodity spanking is due so Obama can pronounce how great things are in America since gas is cheaper, your cereal is cheaper along with your sugar and other goods, but he won’t mention that the package is now smaller. And by the way America is now safe since the frail old sick Bin Laden is dead.

I can just picture his speech now rambling on about the above and stipulating a big, BUT, we just need to print a little more money…

I read an article this past week, the link to which has been lost, showing how nearly every country in the world has higher inflation than they want, except the US!

You know how I feel about words that come from the US government, especially when it concerns economic figures, all fabricated lies. That’s really the only reason I am sceptical of the Bin Laden thing. I heard it from the US government!

Along with the silver capitulation, the great “i” company has also capitulated, at least to me. As many of you know my main creative computer has been in the shop now for over a month. They can’t find the problem and it’s been a very uncomfortable situation for myself here, working solely from my trading computer. In this latest round of excuses they finally capitulated and said they will give me a new computer, for free!

Great stuff, especially since all my old files can still be transferred to it somehow. While I would have certainly much preferred just have my old computer for the past month, there is nothing wrong with a new free top of the line computer, especially since they refreshed their computer line just very recently. They say it will be blazing fast compared to my old one so I’m looking forward to its arrival this coming week.

The thing is my old one was 24 inch and this new one is 27 inch! I may need a bigger desk.

According to some sources George Soros has taken some profits in gold along with a few other large fund managers. The media will tout this as the end of the bull market every chance they get, but ignore it. There is nothing wrong with taking some profits off the table during frothy periods and he’s got plenty more gold to sell off in the years ahead. As the saying goes, you’ll never go broke taking a profit.

Personally I haven’t sold an ounce as the tax issues and plain hassle is not worth in for me right now. When I do decide to sell, hopefully at the top, I’ll be selling at least half of it all at once, and the rest is likely to follow suit quickly.

On the other hand John Paulson remains a staunch gold bull and remains heavily long and is also calling for $4,000 gold in three to five years. Mr. Paulson became famous for making $3.7 billion in the housing collapse but he made $4.9 billion in 2010 with his gold positions! I have a strong feeling his fame is going to increase by multiples over the years to come.

The only thing I disagree with is his low target. While $4,000 gold may seem a stretch, I think it will go much higher than that, but as I’ve said many times, targets are for fools so who really knows. It’s really all in the dollar, or whatever gold is valued in that counts.

See the demise of the Zimbabwe dollar for the most recent example of this. Gold was worth quadrillions of dollars per ounce by the time the currency was abandoned.

We had only one bank fail this past week but five the weekend before as I was gallivanting around the beautiful New York City. This brings the total to six banks that’ve joined this year list of biggest losers in the past two weeks.

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