Silver: A Trader's Paradise

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". . .volatility rules and hence silver is a trader's paradise. . ."

Silver continues to lag behind gold as the two metals in general struggle against this deflationary setting. Gold has benefitted from some of the fears regarding the stability of the credit and banking system but not enough to propel it to new highs.

The counter-asset to gold and silver—the U.S. Dollar—continues to enjoy its season in the sun as mass redemptions and fund liquidations force investors to park their wealth into the safest perceived asset during a deflation and that is cash.

Where do people park their assets during recession? The answer is cash or its nearest derivatives and that is how things are panning out just now. So how does this bode for silver?

Since the dollar topped in November, silver has put in a 45% appreciation and has retraced about 29% of its crash from $21.34 to $8.47. Meanwhile gold has just about retraced a Fibonacci 62% of its down move. Clearly, silver’s role as an industrial metal is dampening its role as monetary metal as commercial silver users cut orders to refineries and work off their excess inventories.

It all depends on the dollar, though we have had the unusual situation of the dollar, gold and silver all rising together recently. That is not a sustainable situation and is a tension between precious metal investors anticipating a break down in the dollar rally but also dollar bulls expecting another flight to cash as the stock market recommences its drop to new lows.

Perhaps the two camps will cancel each other out and we will see the dollar being range bound for a while. That will only be answered when the stock market begins a drop to possibly the 500–600 level.

The conclusion is this, volatility rules and hence silver is a trader's paradise (experienced traders that is!) and, while recession remains, it will stay that way. Longer-term investors in silver should still be buying into silver at these very low prices in anticipation of a new bull taking hold when recession ends and the trillion dollar bailouts begins to bite in terms of inflation further down the line.

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