Should We Still Follow The Chinese And Buy Commodities?

As my impending trip to Hong Kong looms closer, I have been rummaging through a whole bunch of videos, charts and articles on the Chinese markets.

So I was pleasantly surprised to come across a video of millionaire investor, Robert Kiyosaki, preaching the wisdom of Chinese investors.  In this video (which you can watch below), he asserts that “we should be doing what the Chinese are doing” and buying commodities – in particular, silver.

To be fair to Kiyosaki, the video is six months old but I picked it as I wanted to see whether the wisdom of the Chinese still holds true today.

It is certainly true that since January 2009 to the time of making that video interview (January 2010 approx.), the price of silver had risen by 60%.  However, as commodities go, I would argue that silver has been rather dull in its performance since the beginning of this year.

OK, first of all, let me lay my cards on the table.  I am not a buy-and-hold investor.  I do not like buy-and-hold and neither do I recommend or teach it to anyone (for very good reasons that I will go into in upcoming blogs).

Admittedly, I am assuming Kiyosaki was referring to investing in silver (and other commodities such as Gold) as a long term investment.  But even he admitted that he was investing in silver since it was at $3 and not since its current prices.

Granted that between February and May 2010 silver yielded 30%, and it reached highs of $19.70.  However, I have reason to be sceptical about further growth in this commodity this quarter.

A look at the current market trend of silver (see above chart) shows the commodity to be consolidating in a triangle pattern since May.  Silver needs to break the top-side of this triangle with strong volume in order for it to generate any kind of long signal (a signal to buy).

In any case, even if it did break the triangle pattern to the upside, it does not end there.  There is strong resistance ahead in the form of its previous all time highs in 2008 at $20.54.

Why does this matter?

As any professional trader knows, proper money management and risk/reward analysis are the keys to success in trading.

Which means, that even if we were to “invest” in silver now (as opposed to waiting for a proper breakout signal), an entry at $18 would mean a probable exit at $20.  This would leave the long-term investor with a mere $2 reward (or 11% gain).

That is assuming the long-term investor is following some kind of money management system.  If he isn’t then he or she will have to wait for a break above the $20 highs for any sign of further growth.

Furthermore, the MACD histogram (see above chart) is showing a divergence with the rising price of silver on the weekly charts.  The MACD peaks get smaller despite silver putting in higher highs. Most technical analysts would read this as a sign of weakness in silver.  Personally I would reserve my judgement until a breakout from the triangle has occurred (to the upside or downside).

I would like to hear your views too and feel free to let me know what YOU think.  Leave me a comment below, even if you disagree with me.

5 Comments

  1. Well you were clearly wrong on this one.

  2. Hi Dave. Thanks for your feedback. Actually, with respect, I wasn’t wrong at all. In my article I wrote that Silver needs to break out of its triangular consolidation pattern and break past $20 resistance in order for it to be a viable long or “buy” signal. Silver did indeed do both those things and as we saw it rallied to higher prices ($49 in April).

    It is true that I was perhaps a bit too cautious at the time of writing. However, I wasn’t actually saying that silver is not worth investing but merely certain technical conditions need to be met before we buy it. We are not gamblers.
    All the best!

  3. Alessio,

    Why are you not a proponent of the buy and hold strategy when it comes to gold and silver?

    I’m not worried about the current price level. I’m very long on PMs. I’ve been buying and holding for 8 years and have seen this shake down happen multiple times and each time silver responds and reaches new highs.

    What would you do differently (rather than simply holding) if you were sitting on 2000 oz of physical silver of which a large portion was bought at $6-10 an ounce?

    Thank you.

  4. Hi, Alessio.

    I congratulate you for your courage to “make a difference” exposing the present chaotic economical situation, despite the huge opportunities to make money out of it. I have been watching some of your videos and reading some of your posts and I think you’re absolutely right. Things are going to “rock”…very hard…
    I have one question about future trend on silver: being certain that the need for silver in techno industries would rise steeply, do you think that some events like this weeks discovery of some 170 tons of silver on a sunk ship i the Atlantic from WWII, will it have any effect on stock prices in the upcoming weeks? Excuse my ingenuity, but I’m not a trader…
    As for gold trends, I notice that in Portugal (that’s where I’m from…)in the earlier 6-8 months now, there has been an “explosion” of “Gold”Pawn shops, passing from a mere 10-15 shops in late January to more than 350 country wide in the present moment, and rising… In the news, tey say that portuguese people are pawning/ selling about a Ton of Gold/ month. Is this a sign of further rising in gold prices, worldwide? Or are we watching a pre-recession trend like in the USA in the 1930’s?
    Hope my english is not too bad; if so, my excuses, I don’t have that much oppotunities to practice it.

    Will be following your upcoming posts.

    Best regards from Portugal.

    João

  5. Donny – what I was saying was that whenever you buy any stock or commodity you need to know when to sell. Exit strategy is important.

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