Silver tends to form a very periodic, predictably shaped asset bubble. Silver is also relatively volatile compared to most assets like large cap stocks and gold. These two factors – predictability and volatility – offer a potentially very lucrative trading opportunity for silver. I believe that window is opening right now. In this article, we will examine silver's predictability and volatility in great detail so as to prepare for this trade. Figures 1 and 2 are a side-by-side comparison of the two most recent silver asset bubbles in 2007-2009 and the current unfinished cycle that began in August 2010.
Figure 1: Silver - January 2007 through December 2009
Figure 2: Silver - June 2010 to January 2012
You'll notice corresponding points on both charts numbered 1 to 13. These tie in with the date and price tables below. In Figure 1 above (Silver, January 2007 through December 2009), there was a sloping increase from points 1 to 5 after the bubble first started to form. At point 5 the asset bubble burst, dropping sharply down to point 6. The price fluctuated somewhat up to point 11. From there it dropped sharply again to point 12, recovered to 13, then on down to the bottom during late 2008.
In Figure 2 (Silver from June 2010 to January 2012), notice how closely the points match those of Figure 1. The similarity is striking, and while they are not identical twins, you can see that they belong to the same "family". The odds of this particular pattern repeating itself by random chance must be virtually nil. For our purposes, that pattern suggests predictability, which equals great profit potential for traders.
To get an appreciation of that profit potential refer to the data tables in the appendix below. The left side of the tables is labeled SLV Silver 2007 – 2009, "SLV" being the symbol for the popular silver ETF. Referring to the table under SLV Silver 2007 – 2009 you see the words Date, Point, Price, Long, Short. "Date" is self-explanatory. "Point" refers back to the 1 – 13 points shown in Figures 1 and 2. "Price" is for one share of SLV corresponding to the date. "Long" and "short" trades are self-explanatory. Under the Long column is the percentage profit for various trades. The same percentage profit figures are listed in the Short column. Green indicates long trades, red indicates short trades.
Let's look at a specific example. You can see that on 17-Aug-07, the price of SLV was $11.66. That date was also point 1 on the Figure 1 chart. Assuming you bought SLV on that date for $11.66 and sold at point 2 on 9-Nov-07 for $15.29, you had a 31.11% profit. The entire trade from start to finish is highlighted in green since it was long.
Following down the table you see that the long trade from 14-Dec-07, point 3 to 14-Mar-08, point 5 had a 48.62% gain. Directly to the right of that you see the first short trade. It began 14-Mar-08, point 5, $20.42 and ended 21-Mar-08, point 6, $16.70. In this case, the profit was 22.28%.
This will give you an idea of how profitable an asset bubble can be and especially how lucrative trading silver has been recently. To save you the math of calculating compounding profits, if you had just traded long, bought $1000 of SLV at point 1 and sold at point 2 for a 31.11% profit, bought $1311 worth of SLV at point 3 and repeated the entire process to 20-Nov-09, your total compounded gain would be 548% over 2 ¼ years. If you include short trades the gain would have been 1,440%.
These are maximum potential gains, of course, under ideal circumstances with perfect trade timing. No investor will execute every trade perfectly for maximum gain. However, it does illustrate how much potential there is trading the silver asset bubble. You could have a very substantial profit by taking advantage of just half or one third of the potential.
Now consider SLV versus AGQ, the leveraged silver ETF. While SLV had a 71.57% gain from 20-Aug-10 to 31-Dec-10 (right side of first table), AGQ had a gain of 258%.
What will the near future likely hold for silver? In my opinion, the conservative signal to begin buying silver is when the MACD crosses (Figure 2), which will happen shortly. The more aggressive or early warning indicator is when Slow STO crosses, which has already happened. I anticipate that silver should rise over the next 12 months to the $40 level before pausing in advance of the next asset bubble in 2013 – 2014, at which point it could top $100 / oz.
There might be a steady rise from today's price up to $40. However, I think there could also be a near term drop to the $20 to $25 level before the rise to $40. It all depends on how the price of silver is influenced by the stock market and economy as a whole. A comparison of the charts for silver and the contemporaneous charts for the SS&Pamp;P do not indicate any type of direct correlation. The only tentative conclusion that might be drawn is that sharp declines in the SS&Pamp;P and silver will generally occur in close proximity. If we experience a sharp near term drop in the SS&Pamp;P expect silver to drop to $20 to $25 as traders liquidate to raise cash.
Keep a close eye on silver. It could provide an incredible trading opportunity over the next couple of years.
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