Yep, after a month cycling in the Pyrenees, plodding through Sartre's finest works, and smoking Gitanes like they're going out of fashion, JdA is back at her desk, and is rather agog at the sudden outbreak of morale in the silverogosphere.
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| Gold YTD. Watch the 40-day exponential moving average, which I follow in place of the less informative 20-day. |
I received two especially troubling emails today. The first was from a reader who had bought silver at $48 in April 2011 and gold in September at $1900, who wanted to know my opinion regarding when he might once again break even.
Readers may recall this post of mine on 17 February, in which I reported on the curious phenomenon of 'spikes' in the GoldMoney prices for gold in Pound Sterling (GBP).
I first started seriously browsing the PM blog sites at the end of 2010. I'd traded for years (stocks mostly), but was a relative newcomer to the world of investing in gold and silver. I was struck by the huge amount of apparently helpful online advice, charts, and discussion, all dedicated to gold and silver. I'd never had such a resource to draw from when trading the FTSE, so I became something of an avid reader of these sites. A whole new world was opened up to me: one of Turds and talking bears and Keisers and KWNs and Zero Hedges; not to mention Harvey's Organ [sic] and too many others to name.
Strewth, cobber, the controversy surrounding premiums for bulk buys of silver continues to rumble on.
This post will make me about as popular as a fart in a spacesuit, I know. Certainly the PM blogosphere will react with a mix of mockery and vicious hatred. And even my esteemed fellow contributors at Screwtapes will probably run out of eyebrows to raise at what follows.
But I don’t care. There is so much nonsense talked about the PM markets on the web, and so many people are being unwittingly dragged into cult-like devotion to lumps of metal they think will make them millionaires, that I believe it’s becoming ever more important to present every possible side of the case.
So here’s an article about how silver is not the only fruit, and anyone whose sensibilities this offends can b(l)og off and instead read the latest spittle-flecked pant scrapings from SGS (which will no doubt be about Blythe destroying nuclear power plants in Japan at the request of Mossad, or – the new comment section favourite – aliens hoping to steal silver from the COMEX).
Bubble curves and the ‘Smart Money’
But the silver chart has nothing of the Smart Money about it. Real silver bears would say that actually we’re between the ‘Return to normal’ and ‘Fear’ stages. I personally don’t agree with this (QE, and its effects on commodity prices, the continuing push for a mania in the tiny community that is silver, and the fact that silver is not currently too far from its trend line suggest otherwise). However, at best – I mean, in the most positive possible interpretation – we are somewhere in the Mania phase.
I’ll repeat: this does not mean that silver won’t now rise (possibly quite dramatically) for the next few months. I think it will, and I hope to profit from it. But Smart Money it ain’t.
So where should Smart Money go now?
1) The vehicle (stock, bond, commodity, whatever) should have been in a lull (i.e. stagnant) for a considerable period of time. Like gold was between 1998 and 2002 (range: around $270 - 350) or silver between 2000 and 2004 (range: $4 – 6).
2) It will thus have been written off by all pundits. The price gets so low that no-one will sell. But new buyers aren’t drawn in because of the perceived opportunity cost of having their money sat stagnant in a non-performing asset. Like silver in 2003.
3) The vehicle is, however, sound. In other words it is not a company facing bankruptcy or a commodity or good that no-one will ever need again. The business is still profitable (perhaps only just) or the country (referring to bonds, here) is still solvent (also perhaps only just). In the case of silver, it was always going to be valued for jewellery and industrial uses and by ‘eccentric’ retail investors, so there would always be some support to prevent the price dipping (much) further or – in the worst case scenario – to zero.
4) There are clear upside events on the horizon, which – once they take hold – will bring in new buyers, and potentially very quickly. Using gold as an example, we could have said that the Smart Money buying at $280 was anticipating currency devaluation, Middle East crises/oil shocks, whatever. The point is that although the Smart Money did not know the timescale, it knew (or hoped) it would happen. These people are now getting seriously paid (and, in some cases, doing the selling...)
So what assets are there currently floating around that look like they fit these criteria?
Enter stage left, the bank stocks
Now that’s out of the way, let’s have an objective look at the situation. I’m going to use the example of Lloyds-TSB (LON:LLOY), simply because it’s a UK company so I’m familiar with it and the back story, and have some experience from trading it for a while. But I’ll make my disclosure right here: I’m long Lloyds-TSB (and RBS and a few other banks) and I hope to initiate new positions in the next few months. However, I receive no payment from, or have any kind of professional relationship with, any bank (which is a shame, because it would mean I could stop wasting my time blogging and finally land that foxy Brazilian lingerie model of which I’ve always dreamt).
Lloyds-TSB, like many banks, lost most of its value post-2008. In fact, it went from 591 BPC (British Pence) in 2007 to a low of 21.84 BPC in November 2011. In short, it has been in a period of decline/stagnation for over three years (criterion 1). Its chart sure looks like the Smart Money part of our bubble curve:
Lloyds, however, is not bankrupt. Sure, they’re not the money-sucking machine that they once were, and they’ve had a few years of losses, but it looks like 2012 will be the first year since the crash that they declare a profit. Their customer base (on the high-street banking side) is as strong as it ever was, and their efforts to recapitalise have been successful. Their exposure to foreign debt is not great (and has, in any case, been insulated against by their recapitalisations and UK government protections). So, on criterion 3, it’s looking pretty good too.
[An aside: There are always those who will say that the Western banking model is dead, and that the shares will go to zero. Maybe they’re right. But my response to this is that if the UK’s largest banks go bust, then we’ll be so royally [insert expletive] that the best we can hope for is a life of trading acorns and eating our grandmothers and less-favoured children. Good luck buying tinned bacon with your silver in such circumstances: all that awaits a genuine apocalyptic financial meltdown in the US/Europe is death, destruction and chaos. Your PMs will either stay in your possession for approximately a femtosecond or live out their days buried in whatever forest in Montana or Wales you left them. Regardless, the loss of your investment in banking shares will be the least of your problems.]
Now, back to reality, 2012 is likely to see a dividend paid (again, for the first time since 2008) by Lloyds-TSB. And, as mentioned above, its first profit announcement since 2008. Even more important is the fact that the UK government has a 43% stake in the company, at an average of 74 BPC per share acquired during the part-nationalisation. This actually came about not directly because of the 2008 crash, but rather because Lloyds was heavily arm-twisted into bailing out the doomed HBOS during the crash. In any case, the UK government wants its money back. Further, it has to get its money back, as the UK faces decades of austerity if its investments in Lloyds-TSB and RBS don’t pay out. This part should appeal to those who implicate TPTB in every financial machination: the British government has a massive interest in doing whatever it takes to get the share price of Lloyds-TSB at least back up to 74 BPC. Otherwise, ‘good-bye’ ministerial cars and Yes, Prime Minister, and ‘hello’ back bench obscurity. What would you bet on? I rest the case for criterion 4.
Are we at the end of the Smart Money phase for bank stocks?
The night is always darkest before the dawn breaks, goes the old cliché. Continuing with the example of Lloyds-TSB, last year was very dark indeed. The Euro crisis hit it hard, as did the threat of extra regulation and the temporary loss of its chief executive, António Horta-Osório. All of this pushed its share price down to what feels like a bottom of 21.84 BPC. Tellingly, trading in this particular bank stock has since been exceptionally volume-heavy: investors are piling in. It’s risen nearly 50% since then (from 21.83 to 29.97; cf. silver’s move of $32 – $26 – $29 during the same period), and shows no sign of abatement even in the face of potentially very bad news. On Friday, when the news of France’s downgrade was announced, it dipped in line with the rest of the FTSE, and then surged on new buying to finish nearly 3% up on the day.
Why should this be? My theory – and I accept that it is only a theory – is that we are nearing the end of a Smart Money phase in some bank stocks. Those banks that remain profitable and relatively insulated against further risks, and for which most risk has already been priced in, seem to have very little further downside and a hell of a lot of upside. For silver to make a x10 return, it needs to go to $300 an ounce. For Lloyds-TSB to do the same, it needs to go to 220 BPC a share.
It all comes down to which you think is more likely in the next three – five years: $300 silver to achieve six times its best ever price, or Lloyds to claw its way back to one-third of its pre-2008 price. I know there are many who read this site who would say, “that’s easy – silver every time”. Fine. I have silver too, and will be happy with that. But a good investor is a hedged investor, and is also a realistic one. And, for now, I expect TPTB to look after their own interests and restore value to their directors’ shares far more quickly than they will enable silver investors to reap massive rewards.
FULL DISCLOSURE: Long LON:LLOY and LON:RBS and physical silver and physical gold. New positions in each of these are likely to be taken throughout 2012.
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.
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.
