In my opinion, there's 2 phenomenon to anticipate with the spot price of silver and silver specifically based on analysis of historic price moves.
1. An unbelievably high parabolic price increase
2. A less unbelievable, near parabolic price increase, followed by an enormous price correction
For these phenomenon, I believe there are 2 radically different strategies to invest in physical silver.
Let's start by looking at the 34 year price chart for silver:
Someday (possibly soon) I believe there will be a near vertical, exponential rise in the price. Such a move would be similar to the price move in 1979, whereby at the end of 1978, silver's US dollar price was about $6-7 and by the end of 1979, it was rapidly approaching $50 - a prince increase of around 700% in one year.
While there is a plethora of geo-political factors that, in my opinion, could happen to cause such a rise, I won't be so bold as to say any of them will definitively happen right now (although it would NOT surprise me in the slightest if they did). If such was the case and silver DID see such a spectacular explosion in price, as of 25 Nov 2011 with silver spot price coming in at $31.08, this would mean by Nov/Dec 2012, silver spot price could be in the $200 range.
Many will discount the 1979 price move as a one off occurrence, a by-product of the Hunt Brother's cornering the silver market. My personal belief regardless of the circumstances by which that spectacular price rise occurred, if it happened before there's a precedent set for it to happen again.
For this reason, the first strategy for silver investing is to build up a core position of physical silver and hold it until this spectacular price action occurs. Until one is confident in the ins and outs of buying physical (which I will write about in future posts), one should build up their core position by dollar cost averaging a small, affordable amount on regular intervals, and just keep buying regardless of the price.
This core position, I believe should be held in anticipation that an parabolic price increase occurs. When it does, I believe the precedent created in 1979 will be beneficial to determine at what point to trade physical silver for some other tangible asset (absolutely NOT fiat currency or other paper assets that are nothing more than promissory notes).
The analysis to determine this is simple. Simple determine the price at which silver started going exponential in a near straight, vertical line. If the current market price is close to or over 700% it is probably a good time to sell if not all, then a large portion of the core position.
There are other indicators to be watching for as well which may signal whether it is a good (or even wise) opportunities to sell, such as the gold:silver ratio, the gold:DOW ratio, or the gold:housing price ratio. Perhaps the most important indicator is the prospect of a currency collapse through a hyperinflationary depression, which I believe is a very distinct but real possibility (in which case, I do not believe it would be wise to sell silver at all).
This leads to the next the second phenomenon to anticipate with the spot price of silver – the stomach churning, short term cycle of dramatic highs with more dramatic corrections.
If you look at the 10 year silver price chart, you can see a blatantly obvious trend and cycle. The trend is that silver’s price is going up (what some would say is very bullish).
The cycle is that silver’s price has spectacular blow off tops followed by even more spectacular price corrections, followed by a somewhat horizontal consolidation period, followed by another spectacular blow off top.
I do not know that either this trend or this cycle will continue, but delving into some of the fundamentals (which I will write about at a later time), I have strong reason to believe they will.
Going by that assumption, that both the bullish trend and spectacular high-low cycle will continue, I believe using the precedents of the past 4 iterations of this cycle over the past 10 years (which I will write about extensively in future posts) and using a few simple trends, it is possible to determine excellent buying and selling opportunities to profit off the volatility in silver’s price
Fort this reason, the second strategy for investing in silver is using precedents established by the cyclical nature of silver’s price to determine highs and lows at which points to selectively sell and buy. I call this the "investment position", as opposed to the "core position" described above. The investment position you plan to sell in the short term. The core position you plan to keep in case it's the end of the world.
I do not believe in employing the "investment position" strategy it is prudent to necessarily sell with the intent of buying back when the price is lower. Instead I believe this strategy should be employed to sell with the intent of procuring other tangible assets that either provide cash flow or are also sound inflation hedges.
Factoring capital gains taxes and the volatility of silver's price, It will do no good to sell silver at a high and hope that IF the price goes down low enough for you to be able to buy back at that lower price. For this reason, substantial planning must be done in advance of selling opportunities in order to capitalize on the short term tops in silver's price to move into other assets for wealth preservation and a hedge on inflation. As Robert Kiyosaki puts it "cash is trash," and I absolutely do NOT want to be left holding a substantial portion of cash for a prolonged period of time - especially if there is runaway or hyperinflation.
Given the possibility of an exponential increase in price akin to the 1979 price increase, I think a combination of both building a core and investment position in physical silver is a prudent strategy. I don’t want to end up in a position where there is such a spectacular run-up in price and NOT have any physical metal to trade out. Likewise, being a newbie to the metal market, having bought at a peak, then witnessed the price crash 30% almost overnight, I don’t enjoy the feeling of knowing I both missed out on a great buying opportunity and bought on a top (who does?).
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