By: John Fisher
1. The price run up was driven by paper silver, not physical metal. Physical metal investment is a very small fraction of the silver market that is dominated by ETF’s, futures, options and other derivatives.
2. Investors thought they could make a killing by using leverage. So they piled into double long and triple long silver funds. Those who had never bought futures or options began to take large positions. Individuals with brokerage accounts bought on margin.
3. The commodities exchange then raised the margin and maintenance requirements twice, making it very difficult for the small speculator to take and maintain a position.
4. When the sell-off began, large commercial traders piled in on the short side, forcing ‘weak’ longs to be stopped out and/or cover.
5. Computer trading kicked in on the short side and generated huge short pressure as the commercial traders doubled down.
6. Many of the “longs” attempted to average down, only to get wiped out (I mean literally wiped out).
7. Retail investors called their money managers and told them to sell all their SLV and other ETF’s, mining stocks, natural resource funds, etc.
8. Now this thing is really beginning to feed on itself. Where’s the bottom? No one knows, but many are trying to pick the bottom (a very dangerous game). An old adage: “Never try to catch a falling knife”.
9. Last night many turned on their computers to check their IRA, 401-k and brokerage statements, and then began to feel nauseous. More will sell.
10. Finally, look at the attached chart from my friend Alex Stanczyk. Is it really any surprise? Be prepared for silver to retest support in the range of $28-$32. Remember, a few years ago, silver went from $22 to $9 to flush out the weak.
All Things Considered – John’s Commentary:
Three observations:
1. This 30% pullback in 5 days will scare many investors such that they will never touch silver again
2. NONE of my clients who hold physical silver have sold. The paper silver investor (those who own solely paper and no physical) is nothing like the physical silver investor. The paper investors don’t really own silver and they have a short term perspective. The physical investors own silver for its tangible qualities and long term outlook. If you are questioning what I mean, please call me.
3. Gold is only down 4%. Gold is not viewed as hot and speculative – and is still cheap, believe it or not.
Action to take: Start to buy physical gold and silver in modest amounts and benefit from a long-term buy and hold position. This is the opportunity to buy on a correction.
Quote of the day: “In the end, more than they wanted freedom, they wanted security.” – Edward Gibbon
