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Dollar is Doomed – Silver Will Rise

Jeff Clark
Stansbury & Associates, 02Dec08

The dollar is doomed. Anybody who understands the laws of economy recognizes this eventual outcome. The U.S. Treasury is printing money at a record pace. A few hundred billion dollars to help out the banks, $50 billion-$75 billion earmarked for the auto industry, a couple hundred billion to guarantee the good folks in the insurance business can afford their annual retreats, several trillion in new spending promised by the president elect, and on and on.

Pretty soon, we’re talking about real money.

Ultimately, all of this new money will lead to inflation. The dollar will decline in value. And the primary beneficiaries of this decline will be gold and silver.

Right now, though, a stronger force is at work causing the dollar to rally.

Investors need liquidity, and they’re selling everything to get it. They’re selling stocks, corporate bonds, commodities, and precious metals. Then, they’re buying dollars with the proceeds. 

So for now, the dramatically increasing supply of dollars is being offset by a temporary increase in demand. Economics is taking a back seat to the need for liquidity.

But by the look of things, that’s about to change. Here’s a chart of the U.S. dollar…

 

The dollar is up 15% in just the past 10 weeks. That’s extraordinary. Most currencies don’t move 15% in a year. And the dollar accomplished this feat in the face of an endlessly increasing new supply. Like I said… extraordinary.

Recently, however, the momentum behind the move is fading. The dollar is still holding strong, but you can see the negative divergence developing in the moving average convergence divergence (MACD) indicator. That’s a warning sign the trend is about to change.

And since the rally was so sharp and severe, the impending decline should be just as impressive. Once the dollar index breaks below support at about 84.50, it should fall to at least 80 and perhaps as low as 76. That will erase the entire rally from mid-September and ignite an explosion in the price of gold and silver.

The largest gains, however, are likely to come from silver. Here’s the chart…

 

The price of silver dropped to $9.38 per ounce yesterday [01Dec08]. That’s about half of what it was selling for just four months ago. For the past six weeks, silver has been stuck in a trading range between $8.75 and $10.50. And you can see the positive divergence building on the MACD indicator.

If silver can break above $10.50, then the next resistance level is up around $13.50. Ultimately, though, I expect silver could rally back up to its summertime high at $19 per ounce.

You can buy silver outright. Or you can buy the silver exchange traded fund (SLV). Both will profit well as the metal rises.

But the best way to take advantage of the coming rally in silver is to buy the metal at an 80% discount. And the only way to do that is through shares of Silver Wheaton (NYSE: SLW).

Silver Wheaton is a silver royalty company. It doesn’t actually mine for silver… It buys the production of other silver companies at a low fixed price. Most of SLW’s contracts allow it to buy silver for $3.90 per ounce. So even at today’s depressed metals prices, SLW still maintains a $6-per-ounce margin of profit. Of course, as the price of silver rallies, so will SLW’s profit margin.

Under existing contracts, SLW has claim to roughly 2.5 ounces of silver for each share of stock outstanding. Since SLW closed at $2.96 per share yesterday [01Dec08], buying the stock is like buying silver for $1.18 per ounce ($2.96 per share divided by 2.5 ounces of silver per share).

Buying SLW shares is a terrific way to own silver at a deep discount and to leverage the benefits of a rally in the precious-metals market.

[Disclaimer: The Dream Team does not make any recommendations or give any advice.  Michelle and I do not offer any legal, tax, or financial "advice".  The above is a recommendation from Jeff Clark for whom I have the greatest respect.]

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  1. 2 Comment(s)

  2. By Pia | Reply

    Thank you very much – these look great!

  3. By Lucia | Reply

    Love the advice. Thank you.

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  2. Dec 8, 2008: Dollar is Doomed - Silver Will Rise | forexintraday.com

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