Silver bugs bugged out as margins increased on silver and the market's recent failure at what seemed to be everyone's market objective of $50.00 an ounce. Oil tried to hold up while silver was crashing, yet the wave of selling impacted oil as traders looked to preserve profits on part of their portfolio or they simply had to cover to meet a margin call.
The sudden reversal of fortunes raises significant questions. Is the bull market for precious metals are over? Or is this a great buying opportunity? Well the answer to the first question is no. The answer to the second question is yes but with reservations.
The last time the silver market was seriously threatening the $50 an ounce area, we were in the days of the legendary Hunt Brothers. The ketchup magnets got it into their heads that they could corner the silver market only to have the silver market corner them. After silver soared from $2 to near $50, the ensuing collapse brought the silver back to earth and the Hunts to justice.
Yet while silver failed in spectacular fashion, the truth is that the fundamentals that brought silver to this level have not really changed. While we focus on margins and demand from China and India we also have to realize that seasonal demand for silver tends to weaken in May. So while silver may struggle for some time, it still seems to be on target for a longer-term potential objective of near $77 dollar an ounce. The problem is that silver could correct to near $30 an ounce and still have the same objective. Such is the burden of a long-term bull move.
We see corrections along the way in its ultimate journey to its destination. Take gold for example. I have long been on record as saying it will get to the $2,000 an ounce area. Yet earlier in the year when gold had a $100 an ounce correction, many wondered if the bull move is over. I felt that the correction actually made me feel more confident about my longer-term prediction. Again gold looks vulnerable to a correction again and if it happens in a big way, I will not change my long-term target for gold.
This is very similar to the long-term call I had on oil throughout the first decade of the new millennium. Every time we saw a correction in oil, I would get people saying my projection was wrong and the move is over. Yet my market calls of first $40 then $60 and $80, a barrel were achieved over time and do not seem nearly as outrageous as when I made those calls. When you look at any market long-term, corrections are part of the equation. The key for success is to keep the vision and be well capitalized or adjust when the intermediate trend changes.
The other key factor for silver is the Fed. Kind of lost in the silver sell off excitement were the reports of the growing dissent within the Fed. While the Fed voted unanimously with Mr. Bernanke, it does seem very worried that we are headed down the wrong path. In fact this was so disturbing to Congressman Barney Frank he threatened to try to silence Fed regional bank governors by looking to take away their votes on interest policy. He is seeking to threaten the independence of the Fed and bully regional bank governors that dare to speak out. This is a very bold move for a guy that was supposed to be overseeing Fannie and Freddie in the lead up to the financial crisis. If the market senses a major shift in Fed policy, this could slow the rise but ultimately would not stop the markets from hitting their longer-term objectives.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
