Thursday, August 13, 2009

Silver - look out below!

When trading in commodities, one always has to be cognizant of divergences between the commodity price and the underlying stock prices. When the price of the commodity is going up but the price of the corporate stock prices for firms that deal in that commodity are going down, alarm bells should start ringing for the trader. Though nothing is fool-proof in technical analysis, a drop in stock prices when the commodity price is going up is always cause for concern (conversely, a rise in commodity stock prices while the commodity price is declining can indicate an imminent turn higher in the commodity price).

An alarm bell is ringing loudly in the silver sector right now. I am not bullish on silver short-term based on economic weakness and deflation. Gold outperforms silver in a credit contractionary bear market wave, which I believe is about to begin within the next several weeks.

Following is a busy 3 month 60 minute intraday chart that plots the price of silver (green background area plot) versus two senior silver mining stocks - Silver Standard Resources (ticker: SSRI) and Pan American Silver (ticker: PAAS) - which are the black linear squiggles on the chart that nearly overlap and are thus difficult to distinguish from each other (which is part of the point - these two major blue chip silver miners are acting similarly):

Senior silver stocks like PAAS and SSRI are due for a short-term bounce that should last a few days, but then they are a great short as a trade. I believe the silver price is in trouble for the intermediate term along with all commodities. Gold will get hit initially with this commodity drop, but then Gold will re-establish itself as a currency once the commodity bulls are shaken out. I think Gold goes to new highs while commodities don't, confounding most who don't realize Gold is money and a currency, not a commodity. Cash is king during deflation and Gold is the ultimate form of cash!

Now, I am not saying silver is not a good long term (i.e. multi-decade) investment, I am simply talking about the intermediate term. I don't want silver bugs all pissed off at me for telling them the truth. Just because Ted Butler lays out the fundamentals and just because conspiracies against silver exist doesn't mean a fresh intermediate-term price collapse can't occur. Trading is not always based on fundamentals. I will be looking to establish at least one silver mining stock short position once a good bounce higher in this sector occurs.

Yes, the site is called Gold Versus Paper and yes I am a Gold bull. But with my capital that is not tied up in physical Gold I would short my mama if I thought it was a profitable trade (just kidding, ma!). Gold and silver are not the same thing and I think Gold will vastly outperform silver this fall. I remain long the Gold royalty company Royal Gold (ticker: RGLD) and I am waiting patiently to go long Gold miners if we get a good spike low in the senior mining sector in the next few weeks.

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