Status of precious metals

I had lunch with a friend recently and got an interesting question, which made me some pondering: If I think silver will be a good buy in $20's and silver may be experiencing a huge bull with potentially gains of several times the current price down the road, is the current price at low $30's also a good buy as it is only around 10% more from the top $20's?

First of all, one concept in investment is critical to understand: if you lose certain percentage of anything, you have to make double the loss amount to simply get back to where you were. In other words, if you lost 50% of a stock, you will need to make 100% gains to just make back all your losses. So in the above question, we will need 20% gain to get back to the entry point if indeed silver corrects with another 10%.

However, even with a 20% depreciation, it would still be of little impact if the overall gain is several times more. I agree with such a reasoning. The problem is: do I really know the exact low end and the upper end?  If I said yes, I'd be lying to you. I certainly don't know. Is it possible that silver will be dropping below $20? Absolutely. No one will know that for sure beforehand. In 2008, the silver price peaked at about $22 in Mar and dropped to about $8 in Oct, a 60% drop in about 6 months. If silver corrects in a similar scale this time, it will drop to &19-20. How about if it corrects more than that?

I guess I'm not really looking for a specific dollar number to add more silver positions. Rather, I'd be looking for the chart pattern to see if a bottoming process is established. I hope to see the bottoming process in $20s. I know it is a bit difficult to see the sliver price snapping back to upper $30s without attempting to jump in. Personally I'm not convinced that this correction is done, especially seeing the light volume involved when its price appreciates. Of course I may be wrong but I'd rather wait. If you haven't had any silver and you can stomach significantly volatile silver prices, by all means start to buy some silver to at least get your foot in. Just be careful about the position size. Don't be too aggressive at the moment.

Gold seems to fare much better than silver. But similarly its correction, if that's it,  is not significant enough for me to get more of it. I will wait, especially till after Jun 30 to see how the market reacts to the end of QE2. My gut feeling is there may be some quite dramatic actions in the market in the next few weeks.