Judders

The earth shook last night and we have an uneasy feeling that with silver now above $19, a rest is due. We will take another small profit for another great month.

Short Term Top

We mentioned at the end of last month that $17.50 could signify a slightly overbought level. The last few days have also shown signs of caution. With such terrific gains in Dec and Jan, combined with more gains already in Feb, we are going to take the opportunity for a small profit-take. We see two possibilities at this juncture, further gains with a pull-back to $17.00 or profit-taking to betwen $15.50-15.00. Either way protection at this point seems sensible.

Silver Jan Month Close

Performance


Silver ($/ounce) Month End : 16.74 +13.3% per month
Silver Fund (Jan) : +45% month
FTSE 100 Month End : 5880 -8.9% per month
FTSE 100 Fund (Jan) : +78% month
Gold ($/ounce) Month End : 923 +10.1% per month

The price of silver is a one way ticket at the moment. We half expected a full 1/2 point off the interest rates earlier today, that could have stoked the furnace of the silver price to an overbought level. As it is with the 1/4 point cut, we appear to be trundling down the tracks at a steady pace. Above $17.50 at the end of the month may cause some reflection and falls below $15.00 will have to be watched.

Silver Dec and Year Close

Performance

Silver ($/ounce) Yr : 14.77 +18% p.a. (12.52)
Silver Fund (Dec) : +31%
FTSE 100 Year End : 6457 +3.8% p.a. (6220)
FTSE 100 Fund (Dec) : +92%
Gold ($/ounce) : 838 +31% p.a. (639)

Silver this year has significantly underperformed gold and we would expect this year to see the situation reversed. Of course that could just as well mean less of a fall as opposed to a greater rise !

The bounce off $13.6 in Dec should signal the start of a strong rally that lasts well into the first part of next year. The ideal strategy for this is buy and hold, until we see a major trend change. A 'core' position up can therefore be held with small relative trades at either overbought or oversold conditions.

There is, however, an issue with the first few months of the new year when we expect a sell-off in the equity markets. With a much greater involvement of the hedge funds across all asset classes, any sharp equity sell-off may cause a 'sell everything and anything' reaction, temporarily depressing the precious metals. Whether this morphs into something more serious will only be apparent at that time.

We would advocate a long core holding, but would be wary of a pullback to below the $14 level once more. This level could be used to increase the core holding, but with a tight stop in case the economic situation turns ugly.

Stoking the Furnace

Another day, another dollar - well actually another few billion dollars with an added confirmation there will be as many more as neccessary !

This is the fuel to stoke the 'Silver-Train''s furnace, and with the end of week rally above $14, it appears the market may be catching on.

We mentioned fundamentals in a previous post and with the central banks apparent determination to destroy paper money it would be a good time to highlight silver's relationship to gold when both mediums were used as money.

The longest term ratio of silver to gold, in a monetry environment, is 16:1 ( incidentally China has previosly used a ratio of only 10:1.) However, with Nixon's move off a gold-backed currency, the ratio was thrown completely out of kilter rising to over a 100 ! The ratio today is about 56. Our reading of this, is that with governments printing more money now than EVER before, thereby destroying its value, there will be a move back towards monetry valuations. Even if the gold price were to remain unchanged ( not likely ) then the silver price could triple from here. This is only one of a number of fundamentals pointing to the deeply undervalued nature of this forgotten metal.

Casablanca Moment

Could there be a better train departure movie-scene, than when 'Rick' boards the last train out of occupied France. He waited until the last possible moment before receiving a rain-soaked farewell that was the decider to jump aboard.

Parrallel's abound here with the 'Silver Train' edging down the platform. The distant barrage of the central bank's big guns can be heard, their consistant liquidity shelling forcing the train to be on it's way. We've waited with silver longer than some of the other metals but the bounce from the mid $13's may be the rain soaked farewell !

Technically the pattern is not dissimilar to the last great rally that took the price from $8 to $ 14 at the end of 2005, a similar move could well be on the way. Play it again Sam !

Ready for Lift-Off

The 'silver train' has been in the station since April 2006, stocking up with supplies and taking on fuel for the next leg of the journey. The engines were finally fired up late Oct with a break through $13.75.

Friday saw a retest of this price and is the 'All Aboard' call for the next move. There is always a possibility of a final shake-out down to $12.50 to remove the weak hands, but don't bet on it.

Remember, you have to be on the train when it leaves the station. Once the train starts it should pick up speed very quickly on route to the next stopping station of $24.00. Tickets please !