Is Silver a Buy Right Now?

If there weren't a scarlet "B" for bubble around its neck, silver just may be a technical and fundamental buy.

I stumbled into this stunning bit of news almost accidentally last week. While poring through charts late last week, I pulled up the iShares Silver ETF (SLV). A month-and-a-half after the SLV's rather infamous pop to nearly $50 and drop to the low $30's, I expected to see a horrid looking chart, or at most, an extremely volatile range somewhere below $35. But I didn't.

Instead of a slide, I saw an SLV chart building a base at $35. Sellers came in above that level but buyers came in below $35 even faster and more reliably. As my memory bank started triggering, I recalled the Fibonnacci sequence. Boiled way, way down, a Fibonacci sequence posits that stocks making large moves up or down will recover, or "retrace," those gains or losses at predictable degrees. For instance, after the early 1980's bubble popped, silver recovered 34% of its losses in the following weeks (yeah, I looked it up). And 34% is part of the Fibonacci sequence, exactly.

With silver supported below $35, I ran the numbers on a 34% retracement for the semi-precious metal. The technical trade set-up works out to $5 higher (the $15 fall for silver *.34) for a price target and $1 lower as a stop (if silver goes $1 below apparent support, sell). You can quibble on the details. In fact, you should quibble on the details and check out the graphs for yourself. Regardless, silver looks like a technical buy, and that fact freaked me out just a little bit.

Not trusting my lying eyes, Breakout invited Alix Steel, a reporter at TheStreet.com specializing in commodities, to give me the fundamental silver look from her sources. Alix says there's a case to be made for silver, if not fundamentally, then certainly from a supply and demand perspective.

There are two types of inventories for silver on the Comex, says Alix, registered and eligible. Registered is silver not yet spoken for -- akin to sitting on a store shelf waiting for someone to claim it. Eligible silver is that which investors have bought and are letting the CME hold for them.

The amount of registered silver has fallen 38% since the beginning of 2011 with the steepest drop coming in mid-April, as the price of SLV peaked. As of June 8, registered silver stands at 28.7 million ounces, while eligible silver was at 72 million ounces, which is 23% higher for 2011.

The legion of bulls Alix spoke to suggest the drop in registered silver (or silver available for delivery) could lead to a scarcity of the semi-industrial metal. If more investors in silver are holding the actual physical product, there's less of it to go around. Should demand rise from either investors or traders taking possession (either to use for industrial purposes or to hoard), silver could resume it's uptrend, driven this time less by a trading frenzy and more simply by supply and demand.

Again, check the video, my technicals and Alix's homework for yourself. "Playing the bounce" is the deep end of the pool in terms of trading, but with the case building for both the charts and the supply/demand fundamentals, it may be time for a flier on yesterday's bubble play.