By Martin Tillier
It may have escaped your attention, but silver, and the ETFs that track its price, are looking mighty interesting these days.The white metal has been in an extended deleveraging process following the bubbly highs of April 2011, when the iShares Silver Trust (SLV*) got close to $50. It is now approaching the low achieved in June of this year of $17.75.
It is not hard to see that this level is critical, and I believe it sets SLV up for the type of risk controlled trade that I look for.
Looking at the 5 Year chart above, it is obvious that this level has significance beyond the June lows. It also roughly coincides with the resistance levels established before SLV took off in 2010, so the technical support level is clear. What I like about taking a long position in SLV here, though, is that it is quite easy to make a more fundamental, big picture case for the position as well.
Those like me with a forex background tend to look at precious metals as just other currencies, but in silver’s case that is only part of the story. It has several significant industrial uses, not the least of which is its use in electronic devices. It is used in mobile phones, tablets and solar panels; all growth areas in a global sense. Unlike gold, then, silver has a value based on more than just being shiny.
Of course, when considering a commodity, price is a function of demand and supply. As prices took off, so supply increased. Previously uneconomic mines became viable and were resurrected, and scrapping old silver jewelry and flatware became a popular pastime. Conversely, with prices below $20/oz, both of those supply sources can be reasonably expected to slow down and, like the supply increase, that will affect the market over time.
So, if there are all of these good reasons to buy silver, why does the price keep falling?
First and foremost, it is because, as I mentioned, there was a pretty serious bubble that formed in 2011. Most of us are now aware that deflating that kind of bubble is a long and often painful process. There could be further to go, but two years into the deleveraging process and with prices returning to pre-bubble levels, I think it is now worth taking a chance on silver again.
This is especially true when you consider the proposition with an eye to the risk/reward ratio. At the time of writing, SLV is trading at around 18.60, so setting a stop loss on a clean break of the June low, at say 17.30, means risking a loss of around 7%. Even if you only set your initial price target based on the small retracement in August, you are looking at a return to 23.00, an upside of over 23%. Personally, I would take some profit there, but have an ultimate target closer to 30.
Placing and sticking to a stop loss is always an essential part of good trading discipline, but here it is particularly important, as even though I believe SLV is set for a pop, there are several things that could derail the trade.
It is impossible to take any position these days without an eye to the Fed, and should they decide to taper QE earlier or faster than anticipated, it will have a negative effect on the price of all commodities. (Silver is priced in US Dollars, so if the supply of dollars is reduced the price of a dollar in terms of silver will increase. Thus, the price of silver in terms of dollars will decrease.)
Part of the sustained fall in silver’s price has also been due to a slowing growth rate in China, with that situation’s negative implications for global growth. Predicting economic growth in what is still basically a command economy is tricky at best, so while 7.8% GDP growth is still not too bad and most of the bad news looks priced in, the situation there could still be a negative.
These are considerations to weigh, but on balance I believe that buying SLV at these levels makes sense. When easy-to-see technical indicators coincide with a solid fundamental case and a trade with a good risk/reward ratio, I consider it too good an opportunity to miss.
*I should say that if you are a bullion fan, I make no apologies for using SLV as a proxy. I view silver as a trading instrument rather than a hedge against Armageddon, so the accessibility and liquidity of the ETF make it my preferred way of playing the market.
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Martin Tillier has a wealth of experience in Foreign Exchange. He started working for a major interbank Forex broker in London in the 1980s, rapidly acquiring more responsibility and the authority to run larger positions. After several years, he was asked to go to Tokyo to develop the cable (USD/GBP) desk there. He returned to London at a time of turmoil in European currency markets and helped build the company's Sterling Mark (GBP/DEM) desk into the world's most profitable, in the years leading up to the Euro. Highlights included a 36 hour unbroken stint at the desk during black Wednesday, when the Pound was forced out of the European Monetary System. Because of his success in London and his ability to teach new recruits the complex world of Forex trading, Martin was asked to establish Spot FX desks in new markets for the company, first in Moscow, Russia, then in Warsaw, Poland. He left the market in 2002 and moved to the US, following the loss of a family member in the tragic events of September 11th 2001. He spent some time out of the markets, starting and running a successful wine store, but the lure of the financial world was still strong, leading to him selling that business and accepting a position as a financial advisor with a major firm. The frustration he felt while there is what led him to his current position as a writer and educator on markets, particularly Foreign Exchange. The markets were more accessible than ever, but it seemed Wall Street was still doing fine. It was obvious that the retail trader and investor were at a disadvantage, and education could close that gap. Martin now writes regularly for Nasdaq.com and other financial sites, trades Forex and other markets successfully and, in his spare time, plays golf badly. |
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