Serhii Tychynskyi/iStock via Getty Images
By David Smith
As silver breaks out on good volume above $30 – initially confirmed by multiple closes above that price (an event I believe will happen this year) – the number of investors (as opposed to speculators) will do so begin to shrink immediately.
This will continue to take place as the price works its way up towards $50 and accelerates to new all-time highs over the next 12-18 months, towards the magnetic target of $100 an ounce… For starters?
The probability and the reasons for it are the focus of this essay.
“Take clean profits” after holding/replenishing a position for so long. There’s nothing wrong with taking some money off the table, especially in $45-$55 silver, but if you believe (like me) that a literal once in a lifetime opportunity awaits us in gold, the miners and silver in particular, then be careful not to take too much lest you ride the wave with a position size much smaller than you are were willing to risk at lower levels.
Just as you should buy in tranches (portions), you should discipline yourself to, as Stewart Thomson is fond of saying, “sell less than is reasonable”.
“Recency Bias”. “Silver has failed before, either in the high 20’s or around $50, and this time will be no different. ‘Da boyz’ will always be ‘Masters of the Universe’ in this arena. The price will never break out unless they choose to let it.” (Except for the old saw: “You’re always right until you’re not anymore.”)
“Expert” recruiter. Selling behavior is based almost entirely on technical “resistance” levels, be they horizontal resistance/support (HSR) or any type of chart-induced technical formation such as triangles, head and shoulder tops, resistance fan lines, “overbought” signals.
And don’t forget “bikes” and “free rides”.
A runaway market is rare, but when they do occur, or when it’s simply a matter of strong momentum, most technical microanalysis, including “overbought/oversold” water witch assumptions, are better used as a tactic rather than a strategy .
Like many of you, I experienced this up close, in person, and at staggering speed during the 6-month out-of-pit silver and miners blast from late 2015 into June 2016. “Overhead resistance levels” slowed the bullish storm for just a day or two … if at all, before new intermediate highs were reached It went on like this for almost 6 months!
My guess on the back of the napkin is that less than 20% of those with positions in this market have actually taken almost 50% of the profits available. And the rest? Not (almost) that much.
To add insult to injury, the resulting spike was not a surge but a roll-over, allowing reasonably competent investors to convert 30-50% of their gains into a willing crowd of new buyers.
Unbelievable that “everything is different this time”. Folks, I don’t care if you’ve held and added gold and silver for years and that we were all wrong about “the great breakout.” By any rational measurement, even the most rudimentary fundamental analysis, the time will come when silver – along with all other metals – will continue to trade with such grossly distorted price-value metrics.
The market will not drop a starting flag for you. What if we’re not just “three feet from gold”? but three inches? If, not if, this event takes place, it will be a once-in-a-lifetime deal. No second chance for you.
Silver’s (“repulsive”) tendency to underperform gold. Historically, this was the way to bet, but sometimes silver gets a bit mouthy and decides to “do his thing”. Not to mention that in 1979-80 both gold and silver took turns on the price bar while the other stayed quiet for a few days or even weeks.
Plus the way it likes to “break support” and be rejected by resistance line patterns before you do the exact opposite.
Experience shows that when an impulse section gets underway, the predictive ability of most chart data points loses value, often for weeks – even months. If “animal spirits” then appear, anything is possible. It is best to follow the tried and tested motto “Be right. And sit tight.”
Counterparty risk: Most reading this will understand that having your gold and silver in an “unallocated” account means there is another layer of accountability between you and your gold. But what if it’s supposedly “assigned” – held on your behalf?
What if your “allocated” silver isn’t deposited as part of a real storage arrangement or doesn’t actually exist (although you will be charged for insurance and storage)? And what happens if the counterparty goes bankrupt?
And don’t think that this risk only applies to “the little ones”. I would suggest (as David Morgan has been discussing publicly since late last year) that it is likely that some large metals clients who assume their silver is actually being stored on their behalf could prove to be “bag holders”.
A few years ago, a large banking house lost a case precisely for cheating its customers in this way.
As a variation on the theme, there is already precedent for bank “buy-ins” – where a troubled bank takes a large chunk of customer funds to solve its own financial missteps.
We can now “have an advantage”
As Stanley Druckenmiller, one of the world’s largest investors, puts it, “If you know you have an advantage, take advantage.”
If you believe, as I do, that we are on the verge of developing a cutting edge this fine and very sharp, isn’t it time to ‘expand’ that advantage as well?
Original post
Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
Comments are closed.