Golden Minerals Company

MARKETWATCH - SILVER - did it break out yesterday?...

originally published August 26th, 2010

• MARKETWATCH - HUI index analysis - READY FOR THE BIG BREAKOUT?...
  August 27th, 2010
• MARKETWATCH - SILVER - did it break out yesterday?...
  August 26th, 2010
• MARKETWATCH - the CRASH draws closer...
  August 24th, 2010

On our 6-month chart it certainly looks like it. Yesterday's sharp rise saw silver break out of the Triangle that it has been stuck in since May, according to our normal method of drawing trendlines, which is across closing prices. If we are generous and draw an upper boundary of the Triangle across the daily highs, then the last hope for bears is that silver can close back below this upper trendline and then go into sharp reverse - but this may be clutching at straws.

Now while it is clear that silver has a way to go before it breaks into the clear by rising to new highs above $21, the action of the past 2 days, which involved a sharp rise and the Triangle breakout after a period of unusual quiet, makes it very probable that a major advance is just getting started, especially when one considers the potent alignment of price and moving averages (which was also potent for the downside just a couple of days ago). What is meant by a major advance? - long-term charts show that after a prolonged standoff of the type we have just seen lasting for nearly a year that a rapid ascent to the high $20's is quite possible.

While it is obviously galling to have missed out on the sharp rise of the past couple of days, and even more so to have been short, for as you won't need reminding we had thought that it could break down, a key point to keep in mind is that if this breakout is the real thing, then the nascent uptrend in silver is very much in its infancy - in fact its birthday was yesterday, so there is almost everything to go for here on the upside - even after yesterday's sharp rise, silver is still below its June highs in the earlier part of the Triangle. In fairness to ourselves we had admitted we didn't know which way it would break and urged experienced traders to take out a Straddle position (a combination of Calls and Puts), and yesterday Call options in silver and silver related investments soared.

What to do now? Well, after yesterday's fairly decisive action, it is time to go ahead and buy the better silvers, and stops can be placed not far below to limit loss in the (unlikely) event that yesterday's breakout was false. Many silver stocks haven't moved much yet and so there is almost everything to go for. When the point to place stops is not clear on the individual charts of stocks, then the lower boundary of the Triangle in silver itself may be used as a get out point. With this proviso you can go ahead and buy the better silvers and if a powerful rally develops soon, you won't be obliged to do anything but sit and watch for a good many weeks. Those holding ZSL, the Proshares Ultrashort Silver have a variety of courses of action, which include keeping them as insurance for new long positions in silver stocks, taking an immediate loss and switching into AGQ, Proshares Ultra Silver - this tactic has whipsaw risk. And there are a variety of other approaches involving options in both. An important point to note is that as Call premiums in silver and silver related investments soared yesterday, any reaction in silver near-term will likely result in these premiums being slashed which will be the point to pounce on options.

What about the implications of this move in silver for gold and the broad stockmarket? Starting with gold, it suggests that the potential Head-and-Shoulders top in gold that we had observed is about to abort - this will be verified by gold closing above the Left Shoulder high, i.e. above $1250. If this happens then we can reasonably expect gold to break out to new highs and romp ahead as silver continues to advance steeply. PM stocks indices such as the HUI should break out to new highs and also advance strongly.

Of course none of the above is likely to happen in the event that the broad stockmarket caves in, so the message being telegraphed by silver yesterday is that this is now off the table, at least for the time being. What does this mean? - it means that the Fed and the Treasury and the US government, backed into a corner as they are by crushing unservicable debts are going to continue to play the only cards they have left, which is zero interest rates and money creation. This is what yesterday's move in silver is signalling. Will this prevent the stockmarket from eventually caving in? - probably not, but it is intended to buy time. The US economy is in a truly parlous state, with weak domestic demand due to the now very high unemployment, which is exacerbating the collapse in the housing market, the manufacturing base outsourced to other countries, and is burdened by massive unservicable debts that require zero interest rates and rollovers to stave off default. In this most unproductive of environments, all they can hope to achieve with their Quantitative Easing (money creation) and monetization of Treasuries etc is to keep things limping along to buy themselves some more time. The poor old average Joe out on the street will end up picking up the tab of course through a collapse in the currency leading to ramped up inflation. This is why gold and silver now look set to rise. This amazing graphic reveals the startling deterioration in the US economy in just 2 years, and remember this is based on "official" statistics - the real world figures are actually much worse.

Please note that some more charts will be added to this article later today.

Posted at 9.50 am on 26th August 10.