Silver Bells

Merry Christmas to all of our readers.

Studying my charts over a tall glass of 100-proof eggnog (which perhaps should be kept in mind), I've come to the striking conclusion that 2012 will be a good year for silver, and that if the silver bottom isn't already in, it will be by the end of January.

Amazing that after all the excitement of last spring, 2011 will go down into the history books as a negative year for silver. But nothing is more auspicious in a secular bull market than a negative year. The silver bull has seen red, as it were.

After the big crash eight months ago, it was obvious that a long consolidation was necessary. I've been saying that the next truly explosive move in the metals wouldn't occur until even the diehard PM bugs started having gnawing existential doubts, similar to the cognitive dissonance felt by the members of an apocalyptic cult when the world didn't end on the preordained day. I'm beginning to suspect that all this talk about the paper price of silver "decoupling" from the physical price is just such an indicator. I say this because there seems to be no hard evidence whatsoever that such a phenomenon is taking place.

Bron Sucheki, who should know, commented here:

Mining companies sell their 5-6t of weekly production to us at spot and all our big distributors are buying at spot, so paper price = physical price. There is no divergence.

When mining companies stop swapping their metal for London unallocated and buyers start paying a premium above spot (in addition to manufacturing premium) for physical metal, then you'll have divergence.

I'll let you know when that happens.

My point is, even the most diehard PM bugs are bearish on the paper price of silver. But if the paper price is the physical price, you have the first prerequisite of a bottom after a parabolic rise and collapse.

Additionally, just as I suspect that people afraid of deflationary collapse aren't thinking clearly (will central banks really sit and watch that happen, without printing like madmen?), so I also suspect that people afraid silver will trade as a "commodity" when gold trades as a "safe haven" are also irrationally ignoring strong historical data that suggests otherwise. You can go anywhere in the world, even visit the Yanomami in Brazil or the Kombai in Papua New Guinea: I promise you someone will give you value in exchange for gold, and wherever that may be, someone will also give you proportional value in exchange for silver. Both are "intrinsically" valuable in that way (a different connotation of intrinsic than, e.g., "edible," which causes no end of misunderstanding in PM debates). Silver is a safe haven. If it doesn't trade like one at any given time, it's because people aren't really looking for a safe haven.

Now, here's a chart of relative gold and silver performance. I went back 10 years ago, but the results don't qualitatively change if I go back 5 or even 20 years. Silver performance is in red. For gold, I show only plus or minus 20% of gold's performance (in blue). Note silver is generally within the blue channel, and has never performed worse than <20% of gold, but has performed >20% better several times, and in fact isn't too far from +20% even now, after a negative 2011. The take home is this: if gold does well, silver will do well, and probably significantly better in the long term.

Now some charts. Regular readers will recall the chart depicting the ratio between the 10-year Treasury yield and the price of silver (which can be interpreted as how much silver the government must pay you every year for borrowing your money). Over the past 2.5 years, the top of the purple channel has been a great "buy" indicator, and vice versa at the bottom of the channel. Well, we're at the top once again. Maybe we'll overshoot. But do you really want to bet against this ratio's downward trend (that began symbolically after Sept 11, 2001)? And if you're going to bet the ratio will continue to trend downwards … do you really think falling yields will do the work? How much lower can they go? If we hit the bottom of the purple channel in the next 6 months, they'd have to be below 1.0% if silver is to continue falling.

The weekly version of the same chart may even be more elegant:

Regular readers will recall I've used the fibonacci 34-week and 55-week moving averages profitably until September, when they broke down. Well, I've unveiled them again. Look where I've circled (in red) the 4 most memorable "bottoms" of the past 7 years. I've also drawn solid vertical green lines marking all the spots where the 34-week MA (pink) has come down to cross the 55-week MA. Coincidence? (The dotted vertical line marks where the cross occurred in the opposite direction, also at a local bottom).

A back-of-the-envelope calculation tells me that if silver averages greater than $26 and less than $32.50, it will take 4 weeks for these averages to actually cross. So perhaps the bottom won't be in till then. However, note also that the bottom has more often than not come a few weeks before the moving averages actually crossed.

Here's a daily chart of closing prices from the 2008 peak to today. When I connect the 2008 peaks to the April 2011 peak, the slope has the exact same magnitude, opposite direction, as silver's downward trend channel for the past 9 months. Note we're at a triple crossing: the intermediate downward trend channel meets the long term upward trend channel meets important horizontal support -- horizontal support which also happens to be the 50% retracement between the 2008 low and the 2011 peak (see brown lines). (Note the 62% fibonacci held for a long time, and now the 50% is being tested.) The dotted lines depict alternate possibilities, but all suggest a bottom is quickly approaching if not here.

Finally, the gold:silver ratio. The clear long term trend is down. And it appears ready to continue that trajectory, having hit a potential line of resistance.

Look, you don't have to tell me. In the end everything will depend on events. Events (including manipulative events) override everything. But events are inherently unpredictable (otherwise they're already priced in) and fundamentals are poor short term predictors, so if you're an inveterate gambler like me, technicals are all you have. And my analysis tells me things are looking good.


Warren James said...

Very nice Gm, this is encouraging. I do hope the 'decoupling' meme gets addressed sometime in 2012 by someone brave enough to tackle it (the correct interpretation should be able to shed light on most arguments we read).

I concur with your interpretation of 'silver is safe haven', there is good evidence that some investors are treating it as such. Importantly, this is regardless of how that choice will work out for them in the long run — i.e. the relative (and final) performance and comparison between all 'safe haven investments' is a different argument. Your charts here provide a very compelling 'buy' signal :)

All I want for 2012 is that investors out there are making their choices based on good information and not repeated memes. I had a christmas dinner recently where a fellow precious metals bug tried to convince me that the euro was guaranteed to collapse in 2012. We have a 1-ounce, 12-month bet going as to whether or not the euro will survive or not (with me taking the view that it will be fine), he appears to have caught the 'apocalypse meme'. He has a patient wife (good) and 11 months of research, but hasn't considered the Euro currency benefits from a rising gold price, and hence the currency should still be intact regardless of what 2012 brings. It was an easy bet and I feel guilty, but I could not help but note that his purchases were based on this incorrect interpretation of global structures.

Happy New Year, all.

Bron said...

It is good that people buy gold and silver, but the problem with people doing so for the wrong reasons is they will not get out at the right time.

Which is why "good information" is so important. Keep up the good work screwtape.

Kid Dynamite said...

Warren - very well said:

"All I want for 2012 is that investors out there are making their choices based on good information and not repeated memes."

kudos - that's all I've been trying to do with my posts on the subject in 2011 - educate and inform with CORRECT information. as Bron noted, if your thesis is based on false information, you can't possibly expect to be able to act to consistently capitalize on reality.

as for the decoupling meme- I think it's easy to see where it comes from: it's the difference between retail prices (which metal-head noobs see at their coin shop), and wholesale prices (paper prices, which equal the price that real buyers pay for real quantities of metal). So if you're a noob, and you see that Apmex charges spot + $3 for ASEs, or spot + $60 or whatever for gold eagles, you immediately jump on the "paper vs physical" misinformation train. Then, you see it repeated ad infinitum without a shred of evidence backing: "Paper and physical prices CONTINUE to decouple" - and you believe it, despite the fact that it's completely false.

I hope that the Screwtape crew will keep up their efforts to get to the reality of all of the mania and misinformation...

DDT said...

So the long term Gold:Silver ratio is now broken? Currently at 57.4.

GM Jenkins said...

DDT, the main thing I'd be concerned about is the general downward wedge shape of the trend. Is it being compromised this week? Perhaps, but then there will always be outliers, and this week has the pedigree of a textbook outlier. Trading was razor thin until massive selling pressure appeared on no news. The last time silver was down 6 days in a row was after Lehman Brothers - for that to happen on no news reflects to me shenanigans.