Silver Surge Ahead
Research for Online Investors

by John Dalt

11/28/11

The market is off to a rally this morning on good news from retailers over the weekend.  We have more promises out of the eurozone of another “new plan” to solve the fiscal problems of countries under pressure in the bond markets.

Many stocks and commodities were on sale last week as investors and traders ran for the exits.  Precious metals did not escape the carnage.  Here is a chart of the GLD etf.  GLD owns gold bullion and bars to back up the share price.

We have drawn the lower support line for the last six months.  Notice there are two violations of this support.  We have circled them, one on 10/20 and again last Friday.  In October, gold rallied over 10% in two weeks.  GLD is up strongly this morning.  We think there is more upside to come.  Interestingly, GLD can only rally to $171 before it violates the upper trendline.  This would represent a 5% gain over Friday’s closing price.

Here is why I think this is interesting.  When a stock forms a wedge like we see in this chart, it eventually has to break one of the trendlines because they are eventually going to meet.  More often than not, it will break in the direction of the longer term trend.  The long-term trend in gold is up.

The Bank of England is engaged in quantitative easing right now.  France is pressing the Germans to allow the European Central Bank to start printing money.  Last week we learned the last Federal Reserve Open Market Committee discussed another round of QE.

Which way does gold go when there is more money floating around?  UP.  And silver?  UP.  In fact we generally see silver moving higher, faster than gold. Today GLD is up 1.75% and SLV is up 3.25%.  That is because of this chart.

Silver historically trades as an industrial metal, with precious metal characteristics.  It will fall back to what manufacturers will pay when precious metal demand is lower, but take off higher when investors are seeking protection from economic uncertainty.

The next 30 days could be one of those times.  Merkel and Sarkozy are poised to announce a new plan for fiscal integration of the eurozone on December ninth.  The Federal Reserve is meeting on Dec. 13th.

Precious metals can be beaten down when traders have to raise money to cover losses on other equity positions.  You should also watch the value of the dollar in relation to other currencies.  If the dollar spirals higher on eurozone problems, precious metals will suffer in our accounts while rallying in eurozone denominated accounts.

The Wall Street Journal reported last week that central banks are buying gold…”a ton at a time.”  They report almost 150 tons of gold bought in the third quarter by central banks, more than seven times the amount bought in the third quarter last year.  Reported sales were; Russia 15 tons, Bolivia 14 tons, and Thailand 25 tons.  Who is not on the list?  China, and they are suspected of being the largest buyer of all.

Even with the currency risks, and possible takedown with a eurozone driven market meltdown…now looks like a good time to look at a play on precious metals.  We like silver, the “poor man’s gold.”

Mailbag:
I received your SwingTrader message.  You must be the only bullish person in the market.---subscriber S.B.

You are Vicious Brave.---Long-Term subscriber G.O.

John’s reply:  We closed our TNA position this morning for a 6.1% gain in two days.  We don’t get ‘em all correct, but this one seemed obvious.  We are in a great trader’s market right now.  The next move in the markets may surprise everyone.  You can subscribe to SwingTrader and get in on the profits.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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