The sharp recent sell-off in silver (and to a lesser degree gold) has some investors wondering if the commodity bull market has runs its course. While it may be easy to jump to that conclusion given the steep 30% decline in silver from fresh highs of nearly $50 an ounce, the party may not be over just yet. Oil prices were lower as traders reacted to news showing slower economic growth in the United States but were still managing to hold longer-term trend lines and support.
A number of conditions would have to come together in order to prevent additional movement to the upside. For over-leveraged traders who suffered significant losses during the correction, the idea of jumping back into shark-infested waters that just took a massive bite out of their trading capital may not seem very appealing.
It would be a mistake however to assume that the long-term trend has now reversed. Much of the recent correction was driven by a rally in the US dollar combined with tightened margin requirements putting the squeeze on highly leveraged long positions. One could argue that the pull-back was inevitable following the rapid run-up in commodities. Many of the speculators who had no business entering a market they didn’t understand have now been flushed from the sharp decline which could open the door to additional appreciation and a resumption of the upward trend.
The important thing to remember before entering a commodities trade is to control risk. Look for entry points near key technical support areas and always use pre-determined stops to protect yourself from sudden drops. There’s nothing wrong with taking a loss once in a while as long as you protect the majority of your trading capital so you have money to work with when the next opportunity comes your way. As long as you chose your entry points carefully and avoid trying to chase moves that have already taken place, you should see more successful trades over the long run. The short term trend may still favor some additional correction to the downside but this bull may not have run its last race.