Silver has certainly enjoyed an impressive run of late, catapulting nearly a third higher since mid-summer. Because this surge looks nearly vertical on short-term charts, some traders are getting nervous about this rally’s staying power. While silver may indeed be temporarily overbought, its recent strength actually looks like the vanguard of a major new upleg. Silver’s advance is likely just getting started.
Skepticism of silver’s potential continues to run rampant among speculators and investors. But this is par for the course after a major correction. Back in the spring of 2011, silver rocketed parabolic in a gargantuan upleg. But it became wildly overbought, hitting the most extreme greed levels of its entire secular bull. So over the subsequent 14 months, silver corrected dramatically by a staggering 45.5%.
Remember that the job of any correction is to rebalance sentiment, to eradicate the greed and euphoria that necessitated that correction in the first place. So the bigger the upleg leading into a major topping, the bigger the subsequent correction will have to be. Thus it shouldn’t be the least-bit surprising that silver’s biggest upleg by far of its entire bull was followed by its biggest and longest correction.
Silver finally bottomed in this past summer’s precious-metals doldrums, and as always after a major correction sentiment was rotten. Fear and apathy reigned supreme in late June and early July as silver languished near 19-month lows. This metal was largely left for dead, with bearish commentary abounding. But out of just such major sentiment ebbs is when major new bull-market uplegs are stealthily born.
While powering nearly a third higher in the less than 3 months since then may seem excessive, it is really nothing special for silver. This hyper-volatile metal has always been a speculators’ playground. The relatively small size of the silver market means it doesn’t take much capital sloshing in or out to ignite big and fast moves. Considered within the context of its own bull, silver’s latest advance is actually minor.
Perspective is everything in the markets, so we’ll start with a long-term silver chart. Most sizable moves look excessive on short-term charts, and silver’s latest is certainly no exception. But traders worried that silver’s latest surge is too big and sharp to be sustainable are trapped in the tyranny of the present. From a broader strategic perspective, silver’s recent strength simply looks like a young new major upleg.
Let’s start with silver itself, rendered in blue here and slaved to the right axis. In the context of its broader secular bull, the recent 31.9% rally in 2.7 months doesn’t even stand out. In the final month alone leading into its last upleg’s top in April 2011, silver saw a similar gain in far less time. But that surge happened from highs as greed waxed extreme, the polar-opposite sentiment environment from last summer’s lows.