Now for the markets. Silver is taking center stage again. For the second day in a row silver has taken the lead higher and sharply so. Thus far the technical analysis presented by those who contribute to this column has been spot on. Silver has held that $33 area following numerous probes after its devastation and now, with the liquidation over, it is beginning to rocket higher again. What is most intriguing is that silver is making its initial moves up with very little spec long participation. Yesterday, even as the gold open interest rose 10,131 contracts to 531,138, the silver open interest only went up 38 contracts to 121,395.

38 CONTRACTS on a $1.22 move higher with the open interest as low as it has been in a long time. This means the physical market is taking silver higher and also that the shorts are desperately trying to cover some positions while they can, at relatively cheap prices.

Silver’s high today was $38.06 and it stopped right where it was likely to do so. A close above $38.06 ought to send the price spiraling higher.

One more thing. When silver was roaring straight up towards $50 per ounce, I remarked that silver was very oversold fundamentally (meaning the shorts have sold a lot of silver they don’t have), but was very overbought technically, which was obvious by the one way move up day after day. Well, the technically overbought condition was more than resolved, but the fundamentally oversold aspect of the market was not. The JPM crowd is still short too much silver which they cannot deliver … which is what makes this market so explosive.

The Beachball is under water again!..

Calling all ‘Rocketeers of the Happy Silver Ship’,

In recent correspondence I’ve suggested that anyone looking to add to further cabin space for the flight ahead should consider purchasing further seats below $35, Set out below is more evidence to suggest that this correction in Hi-Ho is unlikely to stretch south of the early $30’s and in fact we may have already seen the bottom,

Below is the up to date graph showing the ratio of the Commercial short/long position (red) against the silver price (blue).

On the rare occasions that this ratio has dropped to the ‘Magic 2’ level, it has always historically proven to be a multi-month/year opportunity to buy the metal.

As one can see, it is now down below 2, which is only the 5th time in the duration of this whole silver bull cycle.

Taking each occasion separately:

1) The ratio first fell below 2 on 30th August 2005. The silver fix that day was $6.76. By the 30th May 2006 (some 9 months later) the silver fix was at $12.90!

2) The ratio slipped back to 2 again on the 21th August 2007, with the silver fix that day at $11.67. The ratio remained below this level for a further 4 weeks although the price of silver consistently rose over that period to $12.96. By the 4th March 2008 (some 6 months later) the silver fix was $20.32!

3) On the 30th September 2008 the ratio slipped below 2 again. The silver fix that day was $12.96. The Ratio remained around or below 2 for the next 10 weeks with the silver price bottoming at circa $9. Within about 6 months the price of silver had risen back to above $15, and within about 12 months the price was over $18!

4) On 14th April 2009 the ratio slipped back below 2. The silver fix that day was $12.65. The ratio remained below 2 for a further 2 weeks, with the silver fix bottoming out at circa $12. Within 9 months the price was over $18 and some 2 years later had blown to almost $50!

So one can clearly see, on almost every occasion, the ‘Magic 2’ has signalled both a near term bottom and strong gains to the price of silver in the weeks and months ahead. The slight exception to this was in late 2008, following the collapse of Lehman Brothers, a time when the global markets were gripped by absolute blind panic. On must remember this was a period when the Western banking system was on the cusp of collapse, banks doors were about to close and almost everything was being sold down irrationally as the entire investment community ran screaming for cover. However even on that occasion, while the price of silver continued to fall further, the ‘Magic 2’ still proved in retrospect to be a most dependable signal for any longer term investor that this was a multi-year opportunity in Hi-Ho’s bull cycle to take up positions. And of course anyone who bought over that period would have been looking at quite staggering returns of over 400% only some 2.5 years later.

The collapse of the credit system in late 2008 was a quite exceptional multi-decade event within the global market place, akin to a ‘Black Swan event’, and it taught all in the entire investment community that prices in any asset class can fall much further regardless of the screaming fundamentals behind them. During that period of extreme volatility, the ‘Magic 2’ , like any market indicator, was no absolute guarantee to an immediate bottom in the very short term. However it’s message for any longer term investor was as valid then as at any other time and the returns it then provided for any that might have acted on it were as good as at any time post or prior.

In summary, whether during a multi-decade Black Swan event or just routine bull correction, history suggests strongly the ‘Magic 2’ signals is that ‘The beach ball is under water’ and anyone looking to buy more metal should look to start backing up the truck accordingly!

It also suggests that those still waiting for silver to fall back into the $20’s before clambering once again onto this bulls back could in fact be waiting some time!

It is no coincidence that I’ve been adding to positions across the board in the last few days.
Very best,
Rich (Live from 'The Bridge of the Silver Rocket Ship')