Gold $1,400 - Silver $24 - Moving To The Sideline

During the last 60% plus decline in silver, which occurred during the fall of 2008, I was fortunate enough to move 100% long the metal at the $8 range. I promised myself at the time that if a decline of that size were to ever occur again during the secular bull market that I would push beyond 100% long and use leverage. This is something I would never, ever recommend anyone else do. I help some close friends and family I know with their investments and the maximum level I would ever let them purchase metals is up to 25% of their total portfolio, and that is only in rare cases.

During the most recent decline I pushed through 100% and used leverage when silver hit the $18 - $19 range a few weeks ago. Silver had fallen close to 64% from its high. The sentiment levels were lower than any point I had experienced during my 9 years as a precious metals investor. The majority of silver mines around the world cannot produce silver profitably below $20.

I say this now because as silver has risen almost 30% off the lows I have completely removed my leverage and I am selling into the market. Not because I am any less bullish on the long term potential in the metal (see The Coming Silver Price Surge Will Shock The World), only that even I like to keep a portfolio that is somewhat balanced and cash healthy for other opportunities. Optimism is now returning back into the market. I will wait on the sidelines again until we get the next waterfall decline and pessimism returns, which will hopefully be soon.

I do not recommend anything that I am discussing here, I just know that readers like to know where my head is at in terms of the metals. I also don't want it to sound as if I have any ability to "time" this market. I would have loved to tell everyone (and myself) to sell out of silver a few weeks ago at $30 and re-buy with all their money at $18. I only look to enter markets in general ranges when prices experience significant declines and pessimism is rank. Sometimes that period can last a lot longer than anyone expects, which is excellent if you are looking to steadily accumulate.

The following shows the recent draw down in gold shorts as they have scrambled to cover (to cover a short you must buy it back in the market - this can create what is known as a "short squeeze"). I showed this chart at its peak and discussed the coming short squeeze back in July when gold was under $1,200 in As Paper Gold Shorts Push All In China Buying Goes Parabolic. The scary part is that at this level we are still sitting at close to all time record short positions. It will be interesting to see how it plays out in the weeks ahead.