Portfolio Update: Long Silver

Since the inception of the fund on 12th of December 2011, the first investment was made in Agriculture. The second investment has been made in Silver, as many fund partners request holding Silver for the long term as their form of "saving" instead of holding paper currencies. This investment was made through a physical holding via Eric Sprott's Canadian Custodian ETF. Once again I would like to say that these type of posts will not cover the fundamentals, because it is ones own job to understand long term prospects for different asset classes.

However, if there is one thing I can say, it is that central banks, which have no other option, have now started going completely mad with money printing and devaluing of global currencies. With Japan and the US crisis, just around the corner, any smart man sees no other alternative apart from more money printing, liquidity injections, bank bail outs and kicking cans down the road. All of this, obviously is super bullish for precious metals in the long term.

So with fundamentals still improving for Gold and Silver, smart money always welcomes bears markets as a great gift to buy low and later sell high. As of last nights American trading, Silver was down about 47.5% from its peak at $49.82 in late April. Apart from Cotton, this has been one of the worst performing commodities within the CRB Index in the last 12 months. As a matter of fact, Silver's correction is now in progress for over 170 trading days, which is becoming longer than the 2008 crash (chart above). Long term investors should note that assets correct in both price and time, not just price. On top of that, as Silver touched $26.12 in last nights US trade, Silver was more than 27% away from its 200 day moving average. That is very very extreme. Nonetheless, it is important to note that just because an asset class is down half price from its peak and extremely far away from the 200 MA, does not guarantee anyone they are buying a bottom. That is where timing tools, including sentiment come into play.

One of the best indicators I have ever found is to track what investors do, instead of what they say. The GLD fund flows indicator I developed does exactly that. Chart above shows a 4 week rate of change in fund flows. That means, it reads the difference between current value of the fund and the value 4 weeks ago (one month ago). In other words, this indicator measures sentiment in monthly intervals, posts on weekly basis, to see how much buying or selling investors as a group are doing. As we can see, these guys are currently as bearish as they can get over the last month. This indicator has above average probability of picking intermediate bottoms, so there is a strong chance that we should at least bounce from around $26 level we touched last night in European trade.

In recent months, sentiment on Silver has been extremely low without any ability of recovery. The conditions have been very bearish, price has been falling hard and majority traders saw lower prices. As of this Tuesday, SentimenTrader's Public Opinion readings dropped to the lowest level in at least 6 years or even more. In plain terms, Silver investors are now more bearish, than they were during the depths of the Financial Crisis in October as Lehman Brothers declared bankruptcy. Even more important fact to note is that sentiment readings were posted as of Tuesday's close around $28 to $29. On Wednesday and than again on Thursday, Silver entered free fall and dropped to as low as $26.12, before putting in a reversal. So it is safe to assume that sentiment most likely got even worse during the sell off in the last few days.

It is not only ETF fund flows or sentiment survey's that point to extreme panic, options traders are also negative... actually the most negative they have ever been. I haven't bean able to contact any of my friends who have access to Bloomberg Terminal, but according to Bloomberg Silver ETF puts reached level a record few days ago. I managed to get a screenshot from the ticker menu during TV. On top of that I do know for a fact that both Short Interest and Put / Call Ratio on the SLV (Silver ETF) is extremely high, resembling levels of previous major bottoms.

Finally, speculative positions through COMEX futures tracked by the CFTC Commitment of Traders reports, show that Silver positioning has been reduced to levels that are of the charts. Speculators aka Dumb Money, are actually so bearish, that we have to go back to 2002 to see this little exposure to Silver. Now, do keep in mind that the data is from last Fridays report, which means positioning is relevant up to Tuesday 22nd of December when Silver traded around $29. Once again, as noted above, since than Silver has dropped ay least another 10%, so chances are net long positions are even lower than in the chart above.

Summary

All in all, it is obvious that Silver is very much hated right now and there is above average chance of a rally around these levels. However, bear markets or crashes can go further than most of us think, despite extreme sentiment, so if Silver does not put in a permeant bottom here after bounce takes shape, I will most likely tighten the stop towards entry level to hopefully be stopped out around break even levels. Afterwards, it is a matter of letting further selling run its course again and try buying at lower price (if we actually do go lower)!