Gold News

Is the Silver Price Due for a Breakout?

A Silver Price "bear" changes in tune...

A LONG-STANDING irritant to precious metals bulls, Peter L. Brandt is the CEO of Factor LLC, a Colorado Springs-based proprietary trading firm established in 1980, and primarily trades in futures contracts as well as commodity-related ETFs and individual stocks. 

Brandt has previously called the views of those bullish on the gold and Silver Price "irrational".

So when Brandt's firm recently called for a breakout of silver to the upside, Hard Assets Investor managing editor Drew Voros decided to check in and see what's changed his mind...

Hard Assets Investor: You're typically the guy who doesn't jump on the precious metals bandwagon. Now you're predicting a silver breakout. What's your reasoning?

Peter Brandt: I get accused of being a precious metals bull's worst enemy, but that's not necessarily true. Our firm has made a lot of money over the years by trading gold and silver from the long side. 

And we made a lot of money during the run-up in gold in July and August. But then all of a sudden, we saw some things in silver which were extremely concerning. We felt the silver market had reached a termination point of extreme significance when it came to volume. We looked at the volume figures around the world in futures markets and some of the ETFs. What we saw was that an eight-year supply's worth of silver exchanged hands over a seven-day period. We felt the market was done — it was topped. And we put out a notice on April 29 that the silver market was dead.

But we recently started getting interested in the long side and we went long silver on Oct. 25. We see the possibility that silver could go to the high $50s, possibly the $60s. And we put out some communications on that on the 25th feeling that silver was a buy. We feel that it should probably not drop. There's a danger here that silver has got to hold some of these current levels. If it starts weakening up, we'll change our mind real quickly.

HAI: What weak levels are you talking about?

Peter Brandt: The level that we would really be looking at would be $29.90, $29.80 in silver. If it goes below that, the market probably has significant technical problems and we just read this bullish case wrong. But right now, we believe there is a bullish case. And until proven differently, we're going to assume the bullish case and trade it that way.

For us, the burden of proof right now is on the bears. We trade price. As a proprietary trading house, price is king to us. It's the only thing that matters to us. If we can get silver back into the area of $33.50 or so, we will do some additional buying. But if the market goes below $29.80, then we have to change our mind and reinterpret its technicals. And again we're technical traders; that's what we look at.

Now gold, on the other hand, we do not see as technically positive. Gold for us looks like it could weaken. We really never got the kind of positive signal in gold that we did in silver. We have no position on in gold. If we did, we'd probably short gold. So we've got a little bit of a conflict in our analysis.

HAI: Is the conflict between gold and silver arising from the lack of industrial demand in gold and higher upside in that from silver?

Peter Brandt: We don't even follow those numbers.

HAI: What kinds of economic indicators do you watch that commodity investors should take a look at?

Peter Brandt: We trade each chart based on its own merit. We don't try to create some sort of master narrative that brings all of the various markets under some story. We avoid that like a plague. We don't say, "Well, the Fed's going to do this; therefore, the Dollar is going to do that. Therefore, precious metals will do that." That's a stated no-no within our company. So if we're looking at gold, we make a decision based on gold.

If we're looking at the Dollar, we make our decision based on the Dollar. We'll be right or wrong based on the analysis of the individual market. That puts us into situations where sometimes we have positions that are contrary to what appears to be the conventional wisdom on the narrative at any given time. That's just the way it goes. And we just assume maybe the narrative will change. Maybe we'll be right on one and wrong on the other. Hopefully our profit will be bigger on the one we're right than the one we're wrong. We try not to get too far ahead of ourselves on that. We try to not anticipate things that the European Union is going to do, or the Central Bank is going to do. Although we think basically that our Central Bank and our Fed is being run by a bunch of idiots. But that's a different story.

HAI:You don't watch what the Fed does or what the Eurozone is doing?

Peter Brandt: We watch what they do and we may adjust to what they do in terms of the risk. During periods of great volatility or uncertainty, we may trade things a little bit differently. We may downside our leverage. But we'll generally not do something that we would normally do just because there's uncertainty.

The biggest concern for us generally is not what goes on with the European banks or with the Federal Reserve, but what the Bank of Japan does. That tends to create more havoc for us than anything. We also recently woke up to a big surprise in the Swiss franc here not too long ago as well. We have surprises like that, and we've got to be aware of them. We have to be conscious of the fact that the markets can throw us big surprises, especially during periods of chaos like we have right now. And we try to make adjustments for it. Sometimes we're right, and sometimes we're wrong.

HAI: Why do you think gold and silver are moving together right now?

Peter Brandt: We are very risk-on/risk-off. It seems like it doesn't matter. If the stock market is down, crude oil is down, gold is down. We really have some weird correlations in the market that are probably not going to last very long. Oftentimes when we do have these correlations, then they separate and go their own way. Sometimes those separations can be dramatic.

HAI: Do you think the idea of calling gold or silver a safe haven is a misnomer?

Peter Brandt: No, personally I think gold is. History tells us that paper currencies depreciate against real assets. There are some people who have excellent models and who have done very, very well speculatively looking at gold. I don't know if safe haven is the right word. But they look at gold from the standpoint of being really a form of a currency. It's an expression of wealth, just as currency can be expressed as a storehouse of value. That's true for gold. I don't necessarily buy the argument for silver. You can make the argument that silver is a precious metal. But silver is really a commodity, in my mind. And it will tend to have the boom-and-bust cycles that we see with other commodities. Again, it will have pull from gold to some degree. But it's kind of a cheap man's gold. When you see big spikes in silver, it indicates a representation of the weakest form of speculative buying.

HAI:What are some of the mistakes you think commodity investors make?

Peter Brandt: It has to do with two things. First, it has to do with leverage. We can't believe how leveraged people become and how much they're willing to risk on individual trading events. It's flabbergasting to us. Ninety percent of them leave the game with less money than they started and only a very small portion actually become profitable. And a smaller portion yet become profitable to the point where they could actually call themselves full-time traders and build a trading company around what they're doing. It's a very small percentage.

The primary reason is leverage. In the final analysis, nobody really knows where markets are going. We operate on the premise here as a proprietary trading firm that we may think we know where the markets are going, but in the final analysis, we really don't know where markets are going. We operate on the premise that the next trade that we do will be a loser. And we operate on that premise because over an extended period of time, using the risk management that we use, fewer than 50 percent of our trades end up being closed at a profit.

Most novice traders come in and get enthralled with the bull market that they project into infinity. They put way too much money behind it. They stake way too much of their trading capital against an individual position. And that's an invitation for disaster.

No. 2 is that they get locked into an opinion and they dictate an opinion upon the market rather than letting price interpret their opinion. So do we force our opinion on the market? Or do we accept the market as a statement of the opinion about the market?

Gold investors, for the most part, are pretty sophisticated people who operate on very sophisticated models. Generally these large gold investors don't go short, but there are times when they lighten up their position to an extreme degree with hopes of buying it back. They have a long-term bias. But that bias doesn't necessarily dictate full Dollar commitment in any given time.

Silver bulls, on the other hand, equate opinion with position. They always want to be long. They feel the market owes them. When they're wrong, they blame it on the market. They always seem to have a victim mentality. And they're always arguing for prices that are absolutely obscene. Gold people might be talking about a move back to $1,900 or to $2,000 or maybe $2,200 by the end of the year. Silver bulls talk about silver going to $200, $300. It's almost irrational. And that's been our experience anyway, that large gold investors seem to be very sophisticated investors. They recognize gold as a currency. They recognize the problem with paper Dollars and they recognize that over the long term, gold will appreciate in value relative to paper currencies. That doesn't mean it goes straight up, which is where silver bulls just become irrational.

Our opinion is people who are silver bulls will eventually give their profits back. They may make money, but eventually they'll give it all back. They just don't know the word "sell."

You can buy – and, yes, sell – silver 24 hours a day, 7 days a week on Bullion Vault's live market... is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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