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How Far Does Silver Fall?

May 5, 2011


With silver dropping roughly 19% in the last three days, a correction is clearly under way. Let’s take a quick look at how far it might drop.

I’ve updated the “corrections” chart, which shows all major pullbacks in silver since our bull market began in 2001. The data measure any clearly visible drop in price greater than 10%, regardless of time length. As you’ll see, some drops occurred over short periods of time, while others were prolonged.

It’s clear that silver has had some large and scary sell-offs. But the “silver” lining to that fact is the realization that our current volatility is perfectly normal.

The average of all corrections is 19%. Applied to our high of $48.70 on April 28, silver would fall to $39.44 if it matched an average drop. So as I write, our current pullback is about average – though it’s been quicker than most.

But corrections don’t happen in a vacuum. It’s generally true that the larger the rise, the bigger the subsequent pullback. Silver has registered an incredible 59% year-to-date gain – and measured from its January 28 low, it’s up an astonishing 82.5%. This is important to note because based on my research, this was the biggest surge in the silver price in the current bull market. Thus, it seems reasonable to expect that the metal might fall more than the average.

You’ll notice a couple corrections where silver fell by about a third; if we dropped 33.3%, we’d hit $32.48. As another reference point, a 25% fall would take us to $36.52. And if it matched the giant 53.9% sell-off, we’d get to $22.45, though I wouldn’t hold my breath for that.

The value in this, of course, is that it gives us some idea of where we might start buying again. I personally would love to see $32 silver, because that would represent a healthy sell-off and appear to have limited downside from there. Only if you believe inflation “loses” would you hesitate to buy at that level.

Regardless of when you start nibbling again, it’s important to remember that the fundamentals driving this market haven’t changed one iota. The two big “Ds” – debts and deficits – are among the largest in history and cannot be repaid in sound currency. The U.S. dollar and other fiat currencies are getting inflated into oblivion – the full ramifications of which have yet to play out. In my opinion, viewing silver as a monetary replacement in our current environment is very prudent.

So maybe the appropriate question to ask isn’t “How far does silver fall?”, but “When do I get to start buying again?”

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