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MLR - Silver flirts with $50 premarket

Silver futures flirted with the $50 level, rising as high as $49.82 in premarket action on news that China may move more of its FX reserves into precious metals, launching commodity and forex funds by tapping into its $3 trillion foreign-exchange reserves stockpile.

While the secular bull market in precious metals remains intact, and silver is still well under its inflation adjusted peak price of $129.59 achieved in 1980 (see chart below, courtesy of www.ZealLLC.com), silver is highly volatile, typically moving two to four times the moves of gold, thus it is prudent to keep a close eye on signs of intermediate term tops especially after the huge move we have seen in silver.

Gold, on the other hand, is not overbought thus while silver and gold correlate, a correction in silver would probably result only in a minor pullback in gold. In fact, silver peaked April 20, 2006, then corrected about 20% in two days, but gold held its ground, then proceeded to have its climax top May 12, 2006, 3 weeks after silver had its climax top, as shown in the two charts below:


Finally, in terms of risk management and position sizing, nstead of selling your whole position when your stop is hit, you could also sell in pieces, cutting your position by 1/2 or 1/3 each time silver hits your designated sell stops.


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