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May 01, 2005

Silver Update
by Roland Watson

Since my last article on silver a month ago, the sister metal to gold has continued to trade in a narrow range without any significant clues to its next major direction. But clues are now beginning to indicate where that direction may lie. First we look at silver itself and then we look at other linked indicators such as the US Dollar and HUI index. Silver continues to trade within the symmetric triangle previously discussed but having failed to touch the upper range of the triangle in March it is now dropping back to the lower trend line below $7 at the time of writing. Indeed, I had to update the chart below as silver quickly underwent a large drop to test the $6.80 trend line. This is an interesting point; will the line hold once again or fail? A look at the current one-year correction suggests an end is in sight.

Also, from the point of view of weakness, how significant was it that the upper bound did not touch the trend line at the $8 level? I would say of secondary importance since I attach greater significance to the Elliott Wave analysis. And, in the longer term, the fundamentals take higher precedence than those. The long term forecast remains a buy and hold for silver. Note the 65-week moving average also is holding but that can change as well. There is little time left for this symmetric triangle to complete, indeed it ought to resolve in either direction pretty quickly. In terms of Elliott Wave analysis, the whole year-long correction appears to be what is called a "flat" correction. This is schematically of the form:

The big drop from March last year (our wave A) was of the form depicted in our idealised picture. That is pretty hard to see in our silver chart but thanks to "Rodin" at www.contrarianthinker.com, I got an intra-day chart to which I added this wave count:

If that is the case, then it is unlikely that any further drop from here will violate the old $5.50 low. So, we are currently in the final C wave down. Statistically, this is normally a 12345-impulse wave. If that is what is happening, we are most likely in wave 3 and will break through our symmetric triangle soon and plunge back to the $5-$6 range. So, in my chart, that is the "3?" annotation. The other possibility is that it is a rarer contracting ABCDE triangle. I have added a possible count for that with a "c?" to indicate we may have moved onto a d wave. However, because that pattern has to stay within a contracting triangle structure (not shown), we appear to have broken down in that requirement and therefore I relegate that count to second place. All in all, a little ambiguous, so for further clues, we look at the US Dollar, the gold bugs HUI index and the Commodities CRB index. First of all, the HUI looks particularly unhealthy. It has broken below its own triangle and as suggested in my recent HUI analysis article is heading back to test the old lows of May last year. This is not bullish for silver let alone gold. This must be taken as a negative sign.

Then we look at the US Dollar. New Era Investor is working on the analysis that the end of December 2004 marked the end of the multi-year descent of the Dollar. We now take the view that the Dollar will enter a rally for an extended period. This also is not bullish for silver! The Elliott Wave pattern below is tentative since, like our silver correction above, it could ramble on in a number of different ways for the rest of the year.

Is there perhaps any comfort in the CRB index of which silver forms about 5%? The graph is below. Commodities have been raging since 2002, and will continue to gravitate upwards for some time. I would say that there is one more large up leg before this and that may be judged as bullish for silver. But note that whilst commodities in general have been on a tear for the last year, silver has not shared in that boom. Therefore, we ought to regard the CRB as the least positively or negatively correlated of our three indices.

So, what is our conclusion? The Elliott Wave analysis suggests a break down to the $5-$6 region, hopefully never to be seen again thereafter as the bigger wave 3 launches towards our initial target beyond the $8.50 high of 2004. The completion of this down move should coincide with the near completion of our pending dollar rally. The US Dollar and HUI point to a metal down turn in general, so at this point New Era Investor is medium term bearish on silver. The New Era Investor newsletter will continue to track silver as well as gold as we enter this interesting period. Please visit http://www.newerainvestor.com/ for more details or email the author at newerainvestor@yahoo.co.uk

Roland Watson
http://silveranalyst.blogspot.com

Copyright © 2005-2008 The Silver Analyst

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