Silver Bulls

I saw some comments at Turd's website which called us 'bears'. That's not the case at all, in fact the opposite. But it's true we do like our market analysis without the side order of conspiracy theories. Yes, we'll 'scooby doo' our way through whatever we can - where it deserves attention. The database work continues in the background and I have some good stats and a lot of data. More on that later.

To mix things up again, I just wanted to present my current views on silver. My own technical analysis is rated BB-, but I have a vested interest in what the price action will do. First, Louis wondered recently if the silver chart looked like the parabolic part of a bubble pattern. If it is, then we're about to enter 'fear', 'capitulation' and 'despair' all the way back down. However, I've been thinking (for a while) the last few months have been a bear trap in the formation - i.e. the red area. What do you think?

But of course, the Mayday sell off was unnatural due to margin hikes, same with the January correction, so the pattern doesn't really mean much (but, what if it was engineered to look that way)? Next - someone on Turd's site also mentioned the 30-year cup and handle formation in silver (apologies, I forget who). Looks good to me!! First, a quick primer:

And then, the 30-year chart. I'm not a chartist so apologies for the crudity of this, but you get the idea.

No idea what happens when a cup and handle is 30 years wide, but in theory that means the movement goes .. up, big. But you see, it seems to me that silver is not really priced by supply and demand these days. And that the primary mover is those jolly little algorithm bots which see a pattern and then buy based on that. Regardless of the 'real value' of silver, that won't stop the chart from making itself a self-fulfilling prophecy. Once we're over $50/oz then that is new territory. Just my opinion. Don't trade based on my views. Also, note these charts don't reflect changes in purchasing power of the USD or inflation. But a pattern is a pattern and maybe those bids will come thick and fast (regardless of whether silver is a commodity or money).


GM Jenkins said...

That's a really strong observation: that we're in the "bear trap" phase of the canonical bubble graph. In fact, it's a super bear-trap, because the silver chart appears to have been painted to make it look like we were hitting the manic blow-off top phase in April.

Check out your silver chart under the bubble schematic and imagine there was no sharp late-April peak. It looks very much like a staircase pattern: flat consolidation through last summer, big move up through November, consolidation until Feb 2011, big move up until mid-March, when a 3 month consolidation would have been in order, and the ascent continued this summer. I drew a longer term chart of that here: note how each subsequent upward climb after a consolidation is steeper.

I'm actually opposed to using the word bubble with either gold or silver, because by definition, a bubble represents an item that is extremely over-valued. But value is best defined relative to gold and silver, i.e. by sound money, which is why the worth of something for 99% of human history could conveniently be denoted by how many ounces of gold and silver you could exchange it for. You can obviously only exchange one ounce of gold or silver for one ounce of gold or silver, so the term bubble doesn't apply.

If at one time people were exchanging 300 Federal Reserve Notes (FRNs) for an ounce of gold, whereas now they're exchanging 1800 FRNs for an ounce of gold, that simply means FRNs were in a bubble, and now we're witnessing that bubble pop (in slow motion, thanks to the heavy hand of our wise leaders).

Keep in mind, bubbles are always characterized by short-term thinking: one assumes that in the near term, one can always sell for more than one can currently buy. FRNs fit that definition pretty well, because people are dissuaded from gold if they know that holding 1000 FRNs (e.g. in the bank) will get them, say 1100 FRNs a year from now. They're not thinking historically (i.e. all fiat currencies have a lifespan of 90 years, or whatever, and central banks and governments obviously can't be trusted to keep their integrity) - they're thinking of next year, or 10 years later, like someone thinking he can sell his baseball cards for 5x what he buys them for. Of course, many people correspondingly believe we're in a "new paradigm" -- "Gold is a barbarous relic: fiat currency this time around will last forever!" We'll see about that...

Louis Cypher said...

Hey Warren,
That's why I'm so concerned about silver just hovering around the 38.50 mark and why I won't buy until it moves past the 41.50 area decisively. Because if 48 is "the new paradigm" area the then 38.50 ish means we are at the edge of the cliff.
I'm not sellin my 2 silver eagles here but I'm not a buyer here either.

Kid Dynamite said...

First of all, Warren, you should know by now that anyone who dares to question the blatantly incorrect information taken as religion by the Silver Bugs will be incorrectly branded as a "BEAR" or a "bankster shill."

Secondly, take a step back and look at that silver chart and your bubble mania chart again... whoa mama it looks like we are in the "bull trap" / "return to normal" phase!

I'm surprised to see GM Jenkins use the term "painted" to describe the April action - the april action was a result of mania. There's no doubt about that.

I don't know how anyone who follows the sentiment of the silver market can deny the utter and complete MANIA we experienced in April. Were you guys not reading the same stuff I was? Mania is an understatement.

HOWEVER - the reason silver is so tough to figure out is that, as we all know, it's a small market, and just because the participants in the market were clearly in MANIA MODE, we weren't seeing our postman, cabbie, or restaurant waiters casually mention, "Hey - how 'bout that silver, eh?" which is what I think that you and others mean when they say that silver is not in a bubble...

So that cuts both ways - silver isn't/wasn't a bubble because the number of people who know/care/are manic about is so small, BUT: the silver market is so small that these people can create a bubble in silver prices with their manic behavior - even if your doorman isn't telling you to buy silver.

I currently have no positions in silver related items.

Robert LeRoy Parker said...

So shouldn't the handle on a thirty year cup last for ten years or so then?

Louis Cypher said...

Warren, When I posted chart # 1 back when Silver was running to $50 I was comparing the Silver Rhino Horn to the mania phase. I did NOT read the fine print on those charts.
KD, got me thinking and comparing the Hunt Bros mania to what we just witnessed and I honestly don't believe we have seen the end of the Silver run. Nope, I think you have nailed it as to where we are. But again it's a wait and see confirmation for me before I buy more physical Silver.

Bron Suchecki said...

Silver at $50 was certainly mania, but just within the small precious metal aware investors. From a longer term perspective, we are still in the institutional/awareness phase IMO. There is no way we are in a public/mania phase. Perth Mint Depository has always been a retail investor product and while we are busy, it is not mass market public mania in any way. Also, we don't do or encourage much institutional business, I have seen an increase in people coming to us with business ideas around PMs, so I still see us in the institutional phase.

Kid Dynamite said...

Louis - there's nothing wrong with your wait and see approach - in fact, it's very smart. It's something that, as a trader, I'm STILL trying to learn to do. Basically, the point is that if you buy silver here, and you're wrong, you lose a decent amount of money. HOWEVER, if you wait for confirmation of your trend, you sacrifice the first 20% to make the next 100% that becomes more likely.

This applies to everything, of course - not just silver.

Louis Cypher said...

Bron, Great to have your perspective on this.
KD, I'm really, really trying to fight the urge to splurge.
I could pick up a bunch of Buffalo rounds at spot tomorrow evening but that window will close on Monday. Decisions, decisions.

GM Jenkins said...

If silver really reached its apex in April, and therefore won't touch $50 again for another couple of decades -- i.e. we're in a silver "bull trap" (and not in the "bear trap" formation, as Warren believes) -- then as i see it, you have to bet that gold's bull run is over too. Plainly, it doesn't make a lot of sense to be a gold bull and a silver bear. The average 200-day correlation of gold and silver this decade has been >0.8, and the long-term trend of the ratio has been downwards. Also, didn't silver and gold both peak together in January 1980? Why should this time be different? Seems to me, the gold-silver ratio is just "correcting" after a period in which gold badly underperformed silver. The ratio went from roughly 70:1 to 30:1 in 8 months!

I regard all this skepticism regarding silver really bullish for gold. Take this guy on Jim Puplava's site -- he goes so far as to say that if gold corrects in the coming weeks and silver falls more than gold, then the gold bull run is over. Well, I'll give him this - he sees the connection between the metals!

Warren James said...

Thanks for everyone's observations, it really helps and was nice to wake up this morning and see such quality opinion and feedback.

@Kid Dynamite - yes, after reading those comments on Turd's site I'm getting now a taste of the repercussions of resisting the dogma (the feedback is a beautiful irony). So we got our first 'bear' badge, but we haven't yet collected 'government shill' or the coveted 'bankster shill'. I'm personally hoping to work my way up the ladder to earn the monkier "satanic spawn of blythe". Possibly that's what I'll get when I publish my statements about the ETF serial number data.

Also, you're right - I spent quite some time looking at the chart comparison and realised the "bull trap" / "return to normal" shape does also fit the price data ... we should know this one way or the other in the coming months - as it would still need the massive slide at the end to make it complete, and ultimately time will tell the tale of the final chart pattern. Happily I don't need to wait for confirmation of the trend as my goals (with silver) are already reached (if that makes sense).

I really have symptathy for anyone who bought silver over $45 using credit cards, they will be having themselves a nasty dose of reality around about now. As you say, timing trades is certainly difficult, especially if predicting (or hoping for) a particular pattern.

@Robert LeRoy Parker - yes, you're right. In theory a handle on the thirty year cup should also be quite large. In truth I have no idea, but I venture this explains the current price movement and possibly shows that the robots are still in charge (i.e. possibly they alone are determining the length of the handle). In theory that means we have at least 6 more months of all the silver guys being completely VEXED !!! I look forward to that; it should be amazing entertainment. I would alo suggest the natural cycles are all a bit smaller now (compressed, as Louis suggested once) which might put the bottom of the handle somewhere around the 60-day WB timeline, where maybe it hits $36/oz at which point the Leader comes good on their threat and buys out comex, sending silver skyrocketing (just a random idle thought - as I personally think touching $36/oz is a natural handle length and subsequent blast-off point).

@Bron, thanks for the comment about investment demand for minted retail products. Looking forward to the Perth Mint Year of the Dragon lunar series bullion coin! (yes, I'm a bit obessed with that :) [ folks they start selling it on 1st September].

@GM, thanks very much for your analysis, that is a perfect handover on the issue.

Anonymous said...

Hey, Warren - you're too late. We've already been labelled, 'Bankster Shills'. Take a look at the 11:16 post from "Malcolm" here:

So when are you guys going to give me my share of the JPM money you've obviously been holding back? I was hoping to build another wing on the estate...

Warren James said...

Ah .. didn't see that thread. I'll wear that one with pride. I guess I was once like that too. I am disappointed that they will be disappointed when they learn we're just guys doing standard market research.

The offer to JPM of halting my database work in return for cancelling my mortgage still stands. Actually I'm a little upset they have not contacted me about it - maybe I have to write them a letter.

That's one of the more disappointing experiences in life - the realisation that some things aren't sensational and that boring normality is .. well, the norm.

For anyone asking about our financials, we officially run at a loss, since I'm paying money each month to host the database (paid for by my silver investments of course). I figure it's still a solid investment due to what I am learning.