The big question on the minds of silver investors, and especially silver traders, is whether the melt up in silver has run its course has further to go. On Monday last week we saw temporary burnout with a Reversal Day showing up on the chart at a point where silver was fantastically overbought. On the basis of this, and also the extremely bullish public opinion on silver and extremely bearish public opinion on the dollar (the public are normally wrong) it was reasonable to conclude that silver either had topped out or that a correction was imminent, and that is what we did conclude. However, the situation is now complicated by the fact that the latest COT figures reveal that Commercial short and Large Spec long positions have been dramatically scaled back just over the past week, which is not what you would expect to see ahead of a drop. What should happen is that Commercial short positions either ramp-up or least remain constant.
This latest COT chart by itself portends another upleg soon. To make life even more interesting we had a bizarre divergence between the performance of gold and silver on Friday, with gold soaring and silver reacting back by about $0.50. Even though they theoretically shouldn't, gold and silver normally move as if joined at the hip in their day-to-day fluctuations, so this huge divergence was most unusual. What can we put it down to? Well, silver has stalled out at its 1980 highs and, even though the 1980 highs are 31 years ago, we wouldn't expect much resistance at this level as very few will have held on for all those years, it is still a psychologically important level because a break above it means silver attaining new all time highs, and these highs happen to coincide with major "round number" resistance at the $50 level. Therefore, if silver gets above this level we can expect the melt up to accelerate even more, and the COT chart does suggest that this level will soon fall. This is why silver held back on Friday even as gold advanced strongly—the $50 level is hugely important.
To say that silver's uptrend looks unsustainable on its long-term charts would rank as one of the understatements of the year, given how incredibly overbought it is on its MACD indicator. Yet, as we have observed, the latest COT chart does suggest another upleg. You have all heard the saying "Be careful what you wish for (because you might not like the consequences if it comes true)—and that is certainly the case here, for if silver's melt up continues, and gold moves into melt-up mode, too, which may have just started on Friday, then it probably means a collapse in the dollar—not a drop, a COLLAPSE.
That will have disastrous consequences for the U.S. economy and way of life as a result of inflation ramping-up in the direction of hyperinflation, which will collapse living standards in the U.S. and destroy what's left of the middle class, most of whom will suddenly find gas unaffordable and food very costly. It will be back to commuting to work on a bus, if you're lucky enough to have a job, that is. Look on the bright side—it will at least help to conserve the world's oil supplies.
Obviously, if you are long silver or silver stocks, you will want to milk the melt up for all it's worth—after all, it would be a shame to sell now, and then have silver tack another say $30 in a matter of just weeks. But at the same time, you don't want to be around if the wheel suddenly comes off, especially given that when silver drops it drops like a rock. The way to handle this?—simple—stay long and buy yourself cheap protection in the form of out-of-the-money Put options in silver itself, or Call options in something like the ProShares Ultrashort Silver, code ZSL. The cost of these options is peanuts compared to what you will save yourself if silver should suddenly tank.
Silver Market Update