A Trader’s Take: Should You Still Buy Silver?

At the beginning of 2011 I gave a special forecast to Agora Financial Reserve members (see below)… the resounding recommendation was for silver. Specifically I was quoted saying “I see more potential in silver [than gold.] I look for silver to double in price this year, again.”

In retrospect that was clearly a “profitable” idea. But more than a few investors who acted on silver are scratching their heads, wondering just how long they should hold. It’s great to take gains in silver, but those gains aren’t real until you know when to get out.

This brings me to a recent reader question:

“I was wondering if you feel Silver will continue to run a bit more like Gold? (I know they run together, but wondered if silver has gone too far?)”
- C.B., Houston TX

For starters, markets can go much higher or lower than we think or we feel. When “think” is the key emotional measurement, it often leads to trouble and lack of trading discipline. Truthfully, the less you think, the easier it is to evaluate trading opportunities.

Every financial investment has the same time tested process and methodology. Here’s the list I’ve shared with my Resource Trader Alert readers in the past:

1.    Identify
2.    Execute
3.    Manage
4.    Maximize

The number one focus always has to be on risk: What is the downside, and what are the implications on the portfolio if wrong?

Only after determining that the potential rewards outpace the potential risks does it make sense to move forward with a trade.

My preferred strategy is to trade limited-risk options with enough time to be right. The option vehicle has unlimited upside with limited loss – that’s why they’re ideal for traders who can’t sit and watch the markets all day long.

Silver Psychology

As of this writing, the recent high price in silver futures currently sits at $49.82. That’s the level prices reached briefly on April 25. It’s also a historically significant price – you see, the long-standing target from silver’s 1980 rally (aka the Hunt brothers’ fiasco) sits at a round, psychological $50 an ounce. Gold had long ago achieved those 30-year-old levels and it only made sense that silver would as well.

Previously, we haven’t seen a major unwinding that made the reward to risk appealing enough for a bullish silver play. The danger has been too high for our entry criteria and the market has gone without us. Sometimes it is better to miss a play.

With the price chart accelerated to almost unsustainable levels a breakdown is in the works. We’re already seeing it in the market’s last few trading sessions.

[Editor’s Note: This pullback in price could be the ideal entry point for silver. If you’re not comfortable taking on silver options trades, there are more accessible alternatives to get silver exposure in your portfolio today. The easiest comes in the form of the iShares Silver Trust (NYSE: SLV), an exchange traded fund that holds physical silver on behalf of its investors.]

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

May 3, 2011

A Trader’s Take: Should You Still Buy Silver? was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

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