Yesterday I had a chance to sit down withThe Gold Enthusiast, who recently caved into increasing pressure to cover silver, to ask one question: In the face of all the optimism, why are you cautious on silver right now?
Ummm, OK, it didn’t really happen that way. There wasn’t anyone in the office yesterday. And there wasn’t really a lot of pressure. The Gold Enthusiast spent most of the day driving, alone. But not in the depressing-rainy-Hemmingway-novel sense, it was for good inspiring reasons. Just a lot of driving. So, of course, one of the topics pondered was silver.
You see, your friendly Gold Enthusiast has been plagued lately by one question. If there is so much apparent optimism for silver right now, why does he still feel like it’s a time for caution? Why not throw the farm at it now, while silver is in such a great position with respect to gold? Isn’t silver trading at an extremely high ratio to gold at the moment, and doesn’t that mean it’s time to buy silver?
Well, Yes and No. Yes in the sense that if you’re going to buy precious metals now, it’s a good time to buy BOTH gold and silver. After all, if you think gold is going to rise significantly soon, history says silver will get dragged along, and if that happens silver will likely rise more proportionally than gold. So, check that box.
But No in the sense that we’re not seeing a silver breakout yet. Check out this chart.
Doesn’t that look like something out of a how-to-trade textbook? That’s the actual 10-year chart for SLV, with 1-week bars. Not exactly a jump-in-now kinda chart, is it?
What this chart says (to your Gold Enthusiast) is that we need to stay patient while we wait for our moment to act. According to a classic read of this chart, the first entry for SLV would be a break above 15.19 (which is the bar selected on the chart). Until SLV rises above this level, the odds are just as good that you’ll be sitting in the position for a loooong time, tying up your capital and getting frustrated. We sure don’t want that.
The first Lord Rothschild entry (“I never buy at the bottom, and I never sell at the top”) would be 18. Lord Rothschild was famous for not chasing trends until it seemed to late, and never seeming to be in at the very top. But gee whiz he amassed quite a fortune…
The typical Lord Rothschild entry would be above 20 – the last “major” bump-up on the chart.
Your Gold Enthusiast, liking extreme leverage, is likely to buy “some” above 16, “some more” above 18, and “some more” above 20. With rising stops to protect against fallbacks this strategy of “piecing in” gives both large potential gains and good downside protection. You can’t win on every trade but you can be smart about it.
The Gold Enthusiast
DISCLAIMER: The author has no positions in any mentioned security. The author is currently long FNV, FSM and SVBL in small positions, and may trade these in the next 48 hours if the market cooperates, or bites.
About the Author: Mike Hammer
For 30-plus years, Mike Hammer has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87, the Crash of ‘08, and the Flash Crash of 2010. Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading GroupMore...