The latest from respected analyst James Turk..

Regards - VHF

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Silver's Correction - We've Been Here Before

James Turk

May 9, 2011

May 9 (King World News) Silver’s price drop last week has been variously called historic, extraordinary and unprecedented. It was none of those, as is clear from the following chart (above). We’ve been here before, note the four red ovals. All four outline similar drops in price over short periods of time.

This chart is prepared on a log scale so that the distances shown on the chart can easily be compared in percentage terms. In other words, last week’s drop in the silver price from near $50 is essentially no different in percentage terms from the drop that occurred once $15 was approached in 2006 or the drop after $8 was reached in 2004. In both of these prior instances, silver bottomed after the drop, marking a level from which it climbed to eventually make a new high.

The drop in silver’s price in 2008 was different. Silver continued lower, breaking down from the red oval, but we all know why that happened. Lehman Brothers had collapsed, and in the subsequent rush for liquidity, every asset class was hit – even gold and silver. It was a classic example of the ‘baby being thrown out with the bath water’.

So what is ahead for this current correction? Repeats of 2004 and 2006, or another 2008? My guess is none of the above. It took several months after these three previous corrections before silver climbed above the high price that preceded the correction. This time I expect silver will take only several weeks before exceeding $49.78, the 31-year high reached on April 25th. The reason?

As evidenced by silver’s backwardation, which began in January and continues to this day, the demand for physical silver has really accelerated. As a result of last week’s price decline, backwardation has roughly doubled in size. This is clearly a a signal of strong demand for physical silver, and further evidence of a point I have been making for some time, that the paper silver market is losing its significance as a price discovery mechanism.