Silver Gets Spiked!
An article I wrote was featured in Futures magazine's May 2008 edition and was titled "Metals Fever." I had completed that article and upon review, the editor asked if I would give some comments on trading. Certainly, when writing an article for Futures, it is expected that some mention of trading is included within the context of the overall article. Before moving on to an excerpt of that article, I wish to emphasize that futures trading is not for everyone and in fact most people lose money in the futures markets. Anyone who had a leveraged long position in silver or gold the past few days either had lots of capital in their account or received the proverbial "margin call."
Traders enjoy the leverage that can be obtained using futures and options; however, I would like to bring to your attention the ability for you to invest with commodity-like leverage without as much risk. You see, many mining companies are similar to options that have an unlimited life. How would you like to buy a low price option on silver that never expired? This is basically what you can achieve if you pick the correct mining companies. Yes, the prices do go up and down, but if paid for in full you will be able to hold your position without facing a margin call.
Silver Trading Techniques (excerpt from Futures magazine)
If you want day trading advice or even weekly swings, look elsewhere -- sorry! As a trader, you must know yourself and your abilities. The technique that works best for my personality and ability is to capture large intermediate term swings. This is best accomplished by studying the Commitment of Traders Reports (COT) and carefully observing what I call spike highs and lows. Silver more than most commodities exhibits a behavior of going parabolic for approximately three trading days before the intermediate top is reached. If the parabolic move coincides with a COT report that shows large open interest get ready! The commercial interests are heavily short the silver market and the probability becomes very favorable that we are experiencing a "spike" high.
The only drawback on this trading method, like any, is twofold. First, the amount of trades per year is little, so extreme patience is required. If you can overcome boredom, the second drawback is patience again, waiting until a good bottom forms, usually a spike bottom, before re-entering on the long side. The advantage is that you will capture big moves, and this is what trading futures is all about, as far as I am concerned.
Chart courtesy of StockCharts.com (End of quote)
If you study the chart above you will notice that I was "guessing" that the spike was due because I had to submit the article in February -- two months prior to the April publication date . Silver did peak as I thought, just a bit later and near the $21 level on the continuous contract. Please also note that the "spike" low in August of 2007 was close to the $11 area, and right now as I am penning this week's missive, silver in trading in the $13's and quite frankly is getting overdone in my view.
The Dollar and Metals
Investors are concerned with profits, but also -- more importantly -- with security. Investing in most cases is all about increasing or maintaining one's lifestyle through one's "golden" years. But what about something even more fundamental than saving and investing for the future? What about the core issue of money itself? Most precious metals investors have a far better sense than the average investor of what money is. Contemplate the statement below for a moment.
"We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied soon." -- Robert H. Hemphill, Credit Manager Atlanta FED
Although this statement seems harsh, it is accurate. In fact, the main problem with modern money is that it does not constitute a store of value. From the founding of the Federal Reserve System, today's "dollar" is worth less than four cents. The only two assets that are money, and cannot fail during a credit crisis, are silver and gold.
Many financial authors explain that silver is simply a commodity and, as such, lacks monetary or investment demand. I like to remind such people that the word for silver and the word for money are identical in fifty-one countries. Just because Americans or Canadians do not think silver is money doesn't mean the rest of the world thinks the same way.
Finally, all fiat currencies eventually reach the dustbin. Throughout monetary history, people have sought alternatives to currencies to protect their savings. This action takes place as more and more people wake up to the reality of a credit based monetary system. When enough people wake up, silver will no longer be a sleeping opportunity, but one of the brightest (and smartest) investments one can own.
It is an honor to be,