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Thursday, May 5th, 2011

Expect Vicious Bullion Selloff to Be Short-Lived

Although some technicians we respect think bullion’s correction will stretch into summer, we think it will be over within a week. In our experience, powerful bull markets recoup violent selloffs with rallies that are just as violent. Silver’s correction has been violent indeed, savaging quotes by 25 percent in just a few days. The catalyst for this brazen shakedown was news Sunday night of Osama bin Laden’s death. Who needs bullion when the world is about to become an oasis of peace, right? Yeah, sure. When the revelers return to their senses the world will still be a dangerous place, the central banks will still be printing money by the trainload, and nothing will have changed to diminish the defensive appeal of precious metals.

Under the circumstances, we doubt that Silver will need much base-building to launch an assault on the supposed $50 “barrier.” We view that number not as impenetrable supply, but rather, as a fat carcass waiting to be picked clean by voracious buyers. Let J.P. Morgan and their ilk try to hold the line at $50. They’re going to be dead meat eventually, so why not now? In our years of experience on the trading floor, huge supply tends to coax forth huge demand. As traders like to say, opportunity moves to size. And while the bad guys may have deep pockets and the ability to create tons of “paper bullion” at will, any suspicion that they are trying to cap Silver at $50 is going transform otherwise docile, go-along buyers into aggressive opportunists. This will prove to be equally true for Gold, we are certain. The Chinese government, for one, has given its blessing to any citizen who wants to buy the stuff. Want to stand in their way?