Silver Update

At the turn of the new year, I wrote about silver.  A week later, I revisited it again. Since then a great deal has happened fundamentally and technically. I'll start this piece with a word on the technical picture:

As the chart shows, silver has broken out emphatically from the wedge that had been forming since silver ended its early 2011 parabolic run. I wrote at the beginning of the month that I thought silver would grind lower in the wedge. Additionally, I noted the possibility that silver could breakout of the wedge, although I didn't favor this scenario (i.e. I thought it more probable price would grind lower than breakout). In that chart, the alternate scenario had silver breaking out of the wedge and then back-testing the broken downtrend line. Therefore, I believe that this breakout should be respected, however I won't be chasing this rally. Notice that the RSI 5 at the top is already in overbought territory! Of course, it can stay overbought and price could head higher in the short term. Considering silver is up nearly 30% off its intraday reversal lows on December 29th, it wouldn't be a bad thing for it consolidate somewhat here.

I think it is important to take note of the MACD and long term stochastics. Both have had bullish crossovers in the past several weeks. Due to the technical strength shown in silver the past two weeks, the bottom at $26.15 may be in and the $24.50 target I've been suggesting may not be reached.

(As an aside, today I signed up for a StockCharts account! It will be far easier to track and annotate charts as time goes along!)

I'll address news events concerning silver fundamentals below:

-On January 20th, silver surged around 5%! Later in the day, news broke that Eric Sprott had done a follow-on offering for the Sprott Physical Silver Trust (PSLV). In his most recent interview with Eric King, Mr. Sprott stated that he had raised $349,140,000. He did not say the price for which the silver was paid, but he and Eric King noted that around +10,000,000 oz were purchased. I'm sure the details will soon be forthcoming.

-Silver Eagle sales at the US Mint are certainly robust again to start off 2012.

-Of course, there was this major news event on Wednesday the 25th:

A relatively new communication policy at the Fed has been for the Chairman to hold a press conference and  a Q & A session with reporters in an effort to provide greater transparency to the public about monetary policy at the Fed. This week, Bernanke announced that ZIRP would continue through 2014, after stating previously the policy would extend through 2013. While the Bloomberg article above is laudatory and affirms the new communication policy, Jim Rickards on KWN, had a different take. To point, he stated:

"...this [press conference] was quite a show of fireworks in terms of how Bernanke was engaged in a massive disinformation/misinformation campaign with the reporters, and by extension the American people, over their true intentions."

Mr. Rickards also noted the likelihood of additional money printing. Whether it be for bond purchases or a nominal GDP targeting policy, Bernanke was clear that additional easing would come forth on signs of economic weakness. Bernanke suggested that in the future the Fed wouldn't lock itself into a set of amount of security purchases for a set period of time; rather, policy would be designed to allow the Fed freedom to monetize as much as they deem necessary. It seems to me the Fed wants to continue to monetize, but do so without using the term quantitative easing to be used to describe the policy. Mr. Rickards continues:

"One of the reporters said, 'Do you worry that inflation may get out of control?' The chairman said we are targeting 2% inflation. Of course, I don't believe that. My belief is that they are targeting something like 4% or 5%, and what they really want to do, is say they are targeting 2%, but actually target 4%-5%. Then when they hit that level, [it will] in effect spook people into spending money or getting into riskier assets."

These interviews with Eric King and Jim Rickards are wonderful in that they allow one to cut through the media spin and Fed speak (please read that Bloomberg article to see what I mean). These fireside chats with Mr. Rickards are invaluable -- please head over to KWN and listen to the interview in its entirety. Needless to say, this Fed announcement isn't dollar positive and therefore is quite bullish for silver.