3 Things to Expect from Silver Here

05/11/2011 8:00 am EST

Focus: COMMODITIES

Silver took a tumble, but the longer-term rally seems far from over. If the performance continues as predicted, gold’s cheaper brother could reach $100 an ounce by 2014.

With last week’s frightening drop in silver, every trader seems to be asking if the good times are over for the poor man’s gold. To understand where silver is headed next, let’s take a step back and look at it from a longer-term perspective.

Silver completed an A-B-C rally pattern, from around $18.50 in late August to $49.90 eight Fibonacci months later. I wrote about that coming rally late last August on MoneyShow.com with silver at $18.73, so hopefully you were prepared for the opportunity. I even mentioned long-term targets as high as $45.

That rally was pure crowd behavior in motion, and when you reach the extremes of a “C-wave” in optimism, the next leg down (the “D-wave”) is extremely difficult to predict.

I trade A-B-C patterns all the time, looking for that imminent “C-wave breakout,” and last August, I forecasted a huge move in silver, mostly because a very long B-wave triangle had just about completed, and the powerful C-wave rally was nigh.

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Now that we ended that rally by touching 1980’s all-time high of $50, it was clear we would have a corrective pattern, and the problem was trying to come up with a reasonable “crowd-behavioral” bottom pivot forecast amidst the COMEX interfering with margin requirements like they did last week. This “D-wave” ended in catastrophe for those who were overexposed—or shall I say…greedy.

For those traders who want to dip their toe back in the water, here is the likely path going forward:

  • I expect silver to recover over several months and re-attack the $50 zone again.
  • Silver will get past $50 by year-end, and probably reach $60 before the next strong correction.
  • With three years left in the gold and silver bull cycle from 2001, there’s a very good chance silver will be well north of $100 an ounce by 2014...but one week at a time.

Gold should have bottomed at $1,462 in what I call an “A-wave” down, with the “B-wave” currently bouncing to about $1,520 if I’m right. Once this bounce is completed, I look for a soft pullback to $1,489 or so, followed by a strong rally to re-test the $1,577 highs.

Gold should reach a minimal target of $1,627 on this final 5th wave up from January’s $1,310 lows, with potential to spill higher than that.

Silver has tripped on itself for now, and gold will probably move a tad smoother over the near term, but look for silver to regain its sprinting abilities this summer or fall, re-take the baton from gold, and continue its outperformance.

By David Banister

David Banister can be found at TheMarketTrendForecast.com.

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