The last time I predicted a top in silver prices, it unleashed a fury of hate mail. But that's not going to keep me from speaking up again. (What can I say? I'm a glutton for punishment.)
Yes, I'm convinced silver could be setting up for another correction. What makes me so sure? The same indicator I relied on last time: trading volumes.
Before you cue up another nasty-gram, at least hear me out…
Volume Leads Price
As Peter Brandt, a longtime commodity trader, says, "Volume nearly always leads price in silver." And no one can deny that volumes are currently spiking…
Trading in the iShares Silver Trust (NYSE: SLV), the largest silver ETF, topped 91 million shares last Wednesday. Which is nearly five times the average daily trading volume.
And over on the COMEX, trading volumes in silver futures hit their second-highest weekly total since the April 2011 top in silver prices. And their highest weekly total since the August 2011 top.
So what does it all mean?
Well, the precious metal bulls are bound to argue it's nothing to worry about. That it was merely a knee-jerk reaction to Fed Chairman Ben Bernanke's testimony before Congress. (In case you missed it, he didn't announce any new stimulus efforts – i.e. money printing – like many investors expected.)
But I wouldn't be so quick to write off investors' reactions to the Fed. Or the spike in trading volumes. Not after looking at this chart.
As you can see, if we look at the market tops and bottoms in silver over the last year, two trends are readily apparent.
First, official statements from the Fed tend to coincide with precipitous short-term declines in silver prices. Consider:
- The Fed issued a statement on April 27, 2011, which contained no new stimulus measures. Two trading sessions later, silver prices began a two-week, 35% decline. (Ouch.)
- The Fed issued another statement on September 21, 2011, which also contained no new stimulus measures. Silver's response? It cratered 30.1% over the next three trading sessions. (Double ouch.)
- And finally, the Fed issued a statement on November 2, 2011, which also included no new stimulus measures. A day later, silver began an eight-week, 25% selloff. (Triple ouch.)
The second trend – indicated by the arrows in the chart – is that spikes in trading volumes tend to precede short-term tops and bottoms in silver prices.
Bottom line: Volume does indeed lead price when it comes to silver. So, instead of flippantly dismissing it, it's imperative we consider the latest spike as another sign of a market reversal.
Based on history, a big move in silver prices is likely afoot. And given silver's 27.8% rise in price already this year, the lack of additional stimulus and steadily improving economic conditions in the United States, the most likely direction of that move is down.
Ahead of the tape,
Louis Basenese