Silver is a perpetually
fascinating commodity. It shares much in common with the golden king of
precious metals, yet it is also quite different in so many ways.
While silver has embarked
upon a multi-year primary bull-market journey just like gold, its performance
thus far in this young precious-metals bull has unfortunately disappointed
some. Bull-market-to-date gold has soared up by 52% trough-to-peak,
while silver’s bull-to-date gains have lagged rather dramatically at
31% trough-to-peak at this early stage in the game.
Although silver’s
relative underperformance to gold so far has been frustrating at times,
legions of investors and speculators still eagerly follow it and drool over
its breathtaking potential. Silver is generally a far more volatile
market than gold, and while it can slumber for a long time, once it decides
to finally move it really moves!
Silver gains in history
during episodes of widespread precious-metals enthusiasm tend to dwarf gains
in gold. Investors and speculators blessed enough to have even modest
amounts of capital deployed into silver-related vehicles when silver decides
to finally erupt can earn great fortunes. These legendary gains always
potentially just over the horizon in silver are the primary factor that keeps
its seductive allure alive even during its long quieter seasons.
While a great deal has
been written about the bull market in gold, today’s bull market in silver has even far
greater potential. The reasons behind silver’s massive potential
gains when capital really starts pouring into the precious-metals arena are
well known and widely discussed.
Unlike gold, central
banks are not sitting on well over a decade’s worth of total global
mined silver production in vaults. There is no massive supply overhang
of silver threatening its progress like gold. When silver starts
galloping, there are no huge stockpiles that can be called upon to meet
soaring demand. Once the silver rocket leaves its launchpad,
it has no brakes to slow its glorious ascent!
Unlike gold, very few
primary silver mines exist on Earth today. The vast majority of global
silver production today is simply a byproduct of
base-metal mining, so even skyrocketing silver prices are unlikely to
immediately spur higher silver production for the majority of operations just
mining it as a byproduct. Silver mining
supplies are restricted over the short-term almost regardless of how high
silver runs.
Unlike gold, silver is an
extremely critical metal for all kinds of high-tech computer-age
manufacturing applications. Industrial demand for silver is large and
growing every year with the proliferation of new computing and communications
devices. And as all of these high-tech tools and toys each individually
use only trivial amounts of silver, even a gargantuan increase in silver
prices will probably barely dent global industrial demand. Silver
industrial demand is voracious and growing almost regardless of how high
silver runs.
Unlike gold, the silver
market is very small and relatively thinly traded. There is simply not
much room in silver for new capital. So once precious-metals fever
catches on with the populace again, and speculative fury spills into the
metals, the deluge of new capital into silver will be relatively enormous and
catapult its prices to record levels that few can even imagine today.
All-in-all, the bullish
fundamental case for silver far outshines that of its more popular sibling
gold. Silver’s lackluster performance
to date notwithstanding, once capital starts competing for very limited
silver the white metal will almost certainly soar and leave gold far behind
in the dust.
While the long-prophesied
explosion in silver could certainly erupt anytime with little advance
warning, so far in its young bull market silver has richly rewarded the gunslinging speculators. Its total gains have not
been stupendous yet, but its great volatility has yielded some
incredibly profitable trading swings in recent years. As an example of
this, in our Zeal Intelligence newsletter for our subscribers, we have already traded in and out of one
particular elite silver stock multiple times in recent years, for +47%, +90%,
+30%, and +43% realized wins.
Although silver has
always been near and dear to my own heart, I have not penned many essays on
it since I presented the extremely bullish fundamental case for it in “Lagrimas
de la Luna
”
several years ago. There are several reasons for this long drought of
Zeal essays on silver specifically.
First,
silver tends to move in lockstep with gold so we have been able to
successfully piggyback our actual silver-related trading on top of our gold
analyses. Second, since silver is such a tiny market it is challenging
to uncover good solid information, not mere rumors
and innuendo, about what is really going on in the silver world at any given
time. Third, since silver’s performance has lagged gold there has
just not been much excitement surrounding this precious metal yet.
And
last but not least we hadn’t yet internally developed any particularly
useful trading tools for silver and silver stocks specifically.
Recently however I had written about some gold trading tools we developed and
are using in actual real-world speculations today, the Gold 50/200 MACD
and the Relative HUI,
and lots of good folks wrote in and wondered whether they would work for
silver as well.
This
week I would like to take a look at the applicability of these pure technical
moving-average-related trading indicators that we developed for gold instead
applied directly to silver itself. The results of our initial inquiry
into this line of research this week were certainly interesting and I am very
grateful and thankful to all of you who wrote in and suggested that we take a
look at this.
As
always, it is best to begin with the strategic overview of the bull market in
silver compared to the bull market in gold so we can embark upon our silver
research with the benefit of the proper perspective.
Since
silver and gold are both precious metals, it is not at all surprising that
they tend to correlate quite well. When gold is shining odds are silver
is rallying too, and when gold is suffering silver generally joins it in the
gutter. This graph really helps illuminate why we have been blessed
with success in speculating in silver stocks while using pure gold analysis
as the structural backbone for our actual trading timing decisions in recent
years. Most of the time, as goes gold so goes silver.
While
its bull market has been more modest than gold’s so far, silver’s
bullish uptrend is now very well-defined thanks to the recent interim silver
highs of early September. Silver has conveniently made multiple trips
to both its strong lower support line and its current overhead resistance,
granting technical analysts a nice trend channel to ponder. Yes, this
trend pipe is wide and silver is phenomenally volatile within this channel as
always, but still in the grand bullish scheme of things the silver price is
behaving quite well.
Now
while technical analysis, looking at silver prices alone, is no substitute
for the fundamental analysis I discussed above, it is nevertheless an
important factor to consider. Technical and fundamental analysis
compliment each other and always go hand in hand.
Fundamental analysis is sweeping and strategic in nature, absolutely necessary
to let investors and speculators know whether silver should be in a bull or
bear market based on its supply and demand fundamentals. Since
fundamental analysis only focuses on the giant economic picture however, it
is not very useful for making actual real-time trading decisions within
silver’s bullish uptrend.
This is
where technical analysis, which is short-term and tactical in nature,
absolutely shines. It zooms in within the context of sound fundamental
analysis and fills in the gaps for speculators. Analyzing silver prices
alone in isolation is necessary if one is to develop a sound basis for
executing high-success-probability real-world trades in silver and
silver-related vehicles.
Fundamental
and technical analysis are two sides of one market coin. Fundamental
analysis helps answer the grand “why” question, why is silver in
a bull market. Technical analysis then zooms in next and addresses the
crucial “when” question, when should I buy or sell silver
speculations in order to attempt to realize profitable trades?
Our pair
of gold trading tools that we want to apply to silver this week, the Silver
50/200 MACD and Relative Silver, are purely technical, based entirely off of
silver prices alone. Yes, we know silver is in a bull-market season
fundamentally, but how do we trade it and make educated guesses about
tomorrow’s silver price? Some potential insight may lie in the
fascinating interaction of silver with its two key moving averages, the
50-day and 200-day.
In the
graph above you can observe the raw data, the volatile oscillations of silver
relative to its two major moving averages. While the interaction of the
blue silver line and its white 50dma and black 200dma lines is visually
interesting, our human eye can’t precisely mathematically quantify
these sometimes subtle relationships. Using some simple math and our
gold tools however, we can empirically lock down these fluctuations and read
them off of a common base, making them much easier to interpret.
Our
first pure technical tool to apply to silver today, the 50/200 MACD, (Moving
Average Convergence Divergence) was explained in depth in my recent “Trading the Gold-Stock
Bull 2” essay if you are interested in some deeper
background information. In a nutshell, the 50/200 MACD simply divides a
50dma by a 200dma and converts the quotient into a percentage. When
applied to silver, the result tells us how far silver’s 50dma was above
or below its 200dma in percentage terms at any given moment in time.
As
I explained in my earlier essays on these gold tools, using percentages is
crucial to remove visual skew as the silver bull market grows in strength,
since percentages stay constant over time even as the underlying silver
prices meander higher. A 10% gain in silver is always a 10% gain in
silver, whether it blossoms from a $4 base or a $15 base price in the white
metal. The Silver 50/200 MACD grants us an easy visual way to see a
faithful and comparable representation of the interrelationship of
silver’s key moving averages over time regardless of the prevailing
silver prices at any given moment.
Unlike
gold which has so far tended to stay above its own 200dma
in its gold bull to date, silver’s immense volatility carries it all
over the chart relative to its black 200dma line. As such, before we
created this graph I was pretty skeptical about the
usefulness of running the 50/200 MACD indicator on silver.
Interestingly however, the Silver 50/200 MACD actually did manage to
salvage some structure out of silver’s volatility and make for a
potentially useful trading indicator.
The
light blue line above represents the Silver 50/200 MACD and yields some
excellent timing clues. The whole goal of technical analysis is to
define relatively good moments in time to buy or sell. While
speculators always eat this stuff up, even you dedicated long-term
buy-and-holders ought to pay attention here. The Silver 50/200 MACD
also offers some great insights into high-probability moments to buy silver
and silver stocks at lower points during technical weakness to add to
long-term positions.
If
you look at the lower portion of this chart first, under the dark gray 0%
line, the Silver 50/200 MACD has tended to bottom between -1% and -3% so far
in its young bull market to date. This means that silver has generally
traded low enough for long enough that its 50dma trades between 1% and 3% under
its 200dma before another silver upleg
commences. The implications of this simple observation are obvious.
If
you want to buy silver, silver stocks, silver futures, silver options,
whatever, your best bet is to patiently wait until the Silver 50/200 MACD
slides under zero. The lower this indicator gets, the stronger the buy
signal. Naturally this pure technical buy signal applies to both
short-term speculators and long-term investors, as buying at naturally low
points is super important for the long-term as well and can dramatically
multiply one’s ultimate realized returns.
Conversely,
on the high side of this chart, so far in silver’s young bull its
50/200 MACD has not migrated far above 6% to 7%. If you are holding
short-term speculation positions in silver-related vehicles and you witness a
Silver 50/200 MACD greater than 6% or so, it is probably a good time to
consider either ratcheting up your stop-losses or selling outright.
Caution is in order whenever silver’s 50dma manages to charge more than
6% above its 200dma.
So,
from a Silver 50/200 MACD perspective, silver investors and speculators want
to wait to add new long positions until the Silver 50/200 MACD trades under
0%, preferably down to the -1% to -3% range indicating relatively low silver
prices. And after the ensuing silver upleg
runs, the gunslinging speculators ought to prepare
to sell once this indicator moves above 6% or so.
The
Silver 50/200 MACD is a simple indicator that yields simple rules, but it is
very useful as it helps filter out our own dangerous human emotions in favor of pure technical math. When silver is
undervalued relative to its key moving averages, odds are a good time to buy
is at hand. When silver grows overvalued relative to its key moving
averages, it is probably a good time to think about selling.
My
only caveat about using this tool in your own trades it to remind you to
please realize that the silver bull market remains young and we really
don’t have a lot of data yet. Blossoming well after the gold bull
launched, the silver bull’s two-year anniversary won’t even be
upon us yet until Thanksgiving time, so please remember that the Silver
50/200 MACD is applied to less than two years of bull-market data here.
Nevertheless though, even in its short lifespan so far the Silver 50/200 MACD
looks like a useful technical tool for speculators to consider when making
timing decisions on silver entries and exits.
Finally,
it is interesting to note that the Silver 50/200 MACD today, at around 6% or
so, is on the high side of its recent historical range. While I love
silver stocks and am looking forward to buying on relative weakness, current
conditions based on this indicator certainly do not suggest that now
is an ideal time to buy. On the contrary, stop-losses should be tight
and caution in order as silver may need to consolidate after its awesome upleg of last quarter.
Our
second gold technical tool applied to silver is based on the Relative HUI
concept, which I explained in depth in my “Trading the Relative
HUI” essay. It involves taking a price and
dividing it directly by its own 200dma. The resulting quotient shows
where the price is trading relative to its own 200dma at any given time and
also eliminates chart and price skew.
Ideally
I would like to see this 200dma relativity idea applied to a pure
silver-stock index, but unfortunately I am not aware of a suitable
candidate. To the best of my knowledge there really aren’t any
popular and respected mainstream indices that focus exclusively on silver
stocks alone. Several research boutiques are developing proprietary
silver-stock indices that are promising, but unfortunately for now silver
stocks really don’t have their very own index to call home.
As
such, we applied 200dma relativity to the silver price directly for our next
chart. If a silver-stock index rises to widespread acceptance in the
coming years, which I suspect will happen, we will shift this indicator away
from silver itself and use the silver-stock index.
Incidentally
we did run these charts on most of the elite silver stocks individually
this week as well, but the various single-stock charts were really volatile
and different enough that it was evident a true silver-stock index is really
necessary to complete this analysis. For now though, behold Relative Silver!
Trading
on the Relative Silver indicator is a lot like trading on the Silver 50/200
MACD. The beauty of this simple math is that it removes chart and price
skew and gives us a hard comparison of the silver price to its 200dma over
time. A 1.00 reading indicates that silver is currently trading at
its 200dma, while a greater than 1.00 reading indicates that silver is
forging above its 200dma. A sub-1.00 reading, of course, indicates that
silver is trading under its 200dma.
Once
again the bottom of this chart yields our buy-side technical entry
signals. Generally silver gets interesting as it heads below its 200dma
at 1.00, but really strong buys seem to occur at a Relative Silver 0.95
range, when silver is trading at 95% of its 200dma. Investors and
speculators buying anytime in this silver bull to date when Relative Silver
headed under 0.95 were soon richly rewarded as exciting new silver uplegs exploded higher.
On the
sell-signal side of this technical equation, so far a Relative Silver reading
above 1.10 has warranted caution and the raising of stops if not outright
selling. Each time the price of silver managed to trade above its
200dma by 10% or more, its current upleg seemed to
be running out of steam and limping along on borrowed time.
So,
according to Relative Silver, silver investors and speculators ought to be
throwing long when this indicator heads down around 0.95 or so. The
speculators then should consider preparing to get out of Dodge when Relative
Silver heads above 1.10 or so. Once again this simple technical tool
yields simple and consistent technical guidelines to help investors and
speculators decide on tactical execution timing within a strategic bull
market.
Provocatively,
at around 1.04 today, Relative Silver at the moment is roughly midway between
its strong buy levels at 0.95 and its raise-stop levels above 1.10.
Based on this indicator, if you have current silver-related positions you
probably want to hold them if you haven’t been stopped-out yet, but if
you are waiting to deploy fresh capital now does not look like an
ideal time. Relative Silver is basically neutral today, a hold.
While
these gold tools applied to silver are certainly interesting, I do have to
close with a pair of caveats.
First,
as I mentioned above, the silver bull isn’t even two years old yet so
there really isn’t a great deal of data to define relative technical
high and low points yet. The Silver 50/200 MACD and Relative Silver
indicators may grow into fine tools, but for now they should be used
cautiously as simply a couple more input points for investors and speculators
to consider before making actual real-world trades.
In this
vein, we will be considering the Silver 50/200 MACD and Relative Silver as we
execute actual future real-world silver-stock trades for our Zeal Intelligence
newsletter and Zeal Speculator
alert service subscribers.
We will also be actively working at Zeal to refine our silver trading models
and add new indicators to the mix, as well as adjusting these two covered
here today as more data pours in.
Second,
speculation is always risky on multiple fronts! If you want to
trade silver or silver options or silver stocks, you have to fully realize
and completely accept the fact that you just may be caught outside of your
positions if silver explodes without warning someday out of the blue.
If you cannot accept this risk of missing The Big One, then don’t trade
silver-related speculation vehicles!
Or
you could do as I personally do, always have some long-term investment
capital committed to physical silver and silver stocks while at the same time
maintaining a completely separate short-term portfolio to be used for silver
speculation. This medium-risk strategy always maintains core long-term
long silver exposure, while at the same time granting one the chance to
realize excellent trading gains. I continue to discuss these strategies
as they evolve in our newsletters for our subscribers.
The
bottom line is that the Silver 50/200 MACD and Relative Silver technical-tool
concepts look interesting at this early stage and have excellent
potential. It will be exciting to see how these indicators hold up and
evolve as the awesome young silver bull market continues to unfold.
Adam
Hamilton, CPA
October
17, 2003
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for more information.
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comments, or flames? Fire away at
zelotes@zealllc.com. Due to my staggering and perpetually
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messages though and really appreciate your feedback!
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