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Silver traded to historic highs Monday the 25th of April , taking out the $49.45 an ounce that held for more than 30 years when the infamous Hunt brothers tried to corner the market. After closely reaching $50 where do we go from here. There’s are a technical warning sign in the Relative Strength Indicator (RSI), a gauge of magnitude of advancing days versus declines on down days. The RSI, has reached 89 last week, a level not seen since 2006. A pullback or “blow off top” as more of a short term correction is near, however the ultimate run is not over!

Taking out the old high was psychological. Silver is “not trading on any kind of intrinsic or fundamental value. It’s no surprise that the rally petered out “temporarily”. Regardless, investment demand for physical silver continues with strong demand coming from India and other parts of the emerging world. Momentum continues to side with the buyers.

On the contrarian view of Silver (NYSE:SLV) below I see a rather normalized trending currency, reflecting moderate fiat (dollar) debasement, within a technical framework remarkably similar to late 1980 early 1981. And low and behold, silver has very much been acting within the technical part as it did in 1980. In 1980, it was the Hunt Brothers cornering the silver market. Today, it’s more or less the sentiment of irrationality that is expressed on places like Zero Hedge and through maverick traders like Eric Sprott. One approach is a position in (NYSE:ZSL) (See below link of Silver High Since 1980) as an option trade on the silver market, without the serious risk of time decay you are exposed to with conventional options.

On the inflation side of the trade, I only see a minor pull back with the first major support below the market, to around the $45 an ounce, and $50 is the first major resistance. $125-$150 is the price in real or inflation adjusted terms that I’m targeting in the long run. Buy on any dips. I think this is the perfect opportunity to buy in a pullback price. Ben Bernanke is set to have the Fed’s first impromptu speech of the current fiscal policies to calm the bond and Treasury markets.

Eric Sprott

Canadian asset management firm Sprott Asset Management is lifting restrictions on its popular silver closed-end fund designed to give investors exposure to physical silver, a move that has at least one market observer concerned the fund’s price could be depressed as a result. As silver prices have soared in a parabolic fashion in recent months with New York Mercantile Exchange-traded silver for May delivery nearly touching $50 an ounce earlier in today’s session, Sprott Physical Silver Trust (NYSE:PSLV) has traded at a premium to its net asset value. On Friday, that premium rose to 22%, according to Barron’s.

Last week, Sprott announced in an SEC filing that it was lifting restrictions on 26% of the fund’s total units that manager Eric Sprott and affiliates had held off the market. Those units are worth $10 each, Barron’s reported, and a Wall Street Journal column notes they can be sold at anytime, which could lead to some selling pressure in the Sprott Physical Silver Trust. While the fund currently trades at levels that are more than double $10, making the now unrestricted units all the more attractive for Sprott and its affiliates that hold those units, there are no guarantees those units will actually be sold in the near-term. Consider that Sprott himself recently called silver the “investment of the decade” and said the white metal could eventually trade to $100 an ounce. If that happens, the Sprott Physical Silver Trust would soar in value, in turn leading to an even better exit point for units purchased at just $10.

At the end of 2010, Sprott held stakes in silver miners such as First Majestic Silver (NYSE:AG), Silver Wheaton (NYSE:SLW), MAG Silver (AMEX:MVG) and gold miners Yamana Gold (NYSE:AUY) and Brigus Gold (AMEX:BRD).

Silver has stolen the spotlight among investors in recent days after surging nearly $50/oz.  Lost in all the commotion, however, are the wildly disparate rumors accompanying silver’s rally.  It’s hard to believe that it has been only a week since a widely circulated story concerning a large hedge fund which supposedly made a “gargantuan” bet against silver.  This story, which smacked of being planted by speculative interests, was circulated by some otherwise reputable financial publications.

As we’ve talked about in past commentaries, whenever extremely bearish news stories are circulated in the financial press it carries a contrarian implication in most cases.  In an established bull market like the one for silver, it’s dangerous to sell short based on a rumor since the major trend is up and a large buildup in short interest can create explosive rallies when everyone decides to short the market at the same time.  This is what apparently happened last week and temporarily today.

Here’s a quote from the story that appeared in the financial press last week:

“A gargantuan bet against silver values was placed into position [April 11] with the initiation of a one million-share-large put on the iShares Silver Trust (SLV) – at the $25 level by July. The bet constituted the largest single options trade on US exchanges and came as silver was touching the 31-year high watermark near $42 per ounce.   The (as yet) unidentified buyer of said puts is in effect counting on a 37% decline in silver prices by that timeframe and is perhaps reinforcing the UBS-originated opinion issued [April 11], that ‘it takes a brave investor to buy silver right now.’”

Assuming the above statement contains the truth, the fact that several financial news wires picked up on this and circulated it with a scary headline definitely helped generate a bearish bias in the silver market among inexperienced retail traders.  It also undoubtedly resulted in many of the bears losing their shirts. One writer for the popular Seeking Alpha web site called for a 20% correction in the silver price.  He based this forecast on the fact that the silver price was dramatically over-extended from the 200-day moving average.  The lesson here again is that’s extremely dangerous to short an established uptrend based on scanty technical evidence.  Unless there is an extremely compelling (and hopefully non-publicized) reason for doing so, the best policy is to refrain from selling short in a bull market.

Please note the increased volume spike ZLV and SLV of all time highs. This leads to suggest one yes, shorts had to cover on both ends which forced higher prices, but secondly the bears build an increased bear presence to temporarily trip the rally.

Click on links below to see prior discussions and calls on Silver. (NYSE:SLV)

Silver Hits New High Since 80′s

Short Squeeze in Silver & Gold Coming Feb. 2007

Triffin Dilemma

New Silver Margin Requirement

Food Inflation Wal-Mart

Gold and Silver: History and Stocks

Silver – Long Term Investment

October 8, 2008 on Silver and Gold