In order to understand why silver looks exceptionally bullish emerging
out of this year’s typical summer doldrums, we need some technical perspective. Back in the summer of 2008, silver was
consolidating high after a massive rally in late 2007 (which started in autumn) and early 2008. Then the brutal stock panic hit like
an F5 tornado, destroying the global appetite for all risky assets including
silver. In just 4 months, this
metal plummeted a sickening 53%!
Ever since that epic panic anomaly, silver has been relentlessly
recovering. This recovery
provides the critical strategic lens through which all recent price action
must be considered. Silver had
already stubbornly returned to its pre-panic price levels last autumn. It averaged $18.07 in July 2008 before
the panic, and $17.90 in November 2009 after last year’s autumn
rally. Since then, it has
generally consolidated sideways.
Provocatively, this high consolidation over most of the past year
occurred within the old pre-panic
high-consolidation range.
Silver did fall out of this range once, when it plunged 20% in 3 weeks
in late January and early February 2010 in response to sharp gold and
stock-market retreats. But that
correction was quickly erased, silver rapidly climbed back up into this
high-consolidation trend less than a month later.
High consolidations are basing
events, very important technically.
After any fast rally to new price levels not yet seen in a bull,
traders are nervous about whether those seemingly-stellar prices are
sustainable. Some traders,
looking for a correction, sell.
Meanwhile other traders, excited because the price has rallied so far,
buy to ride the momentum. The net
result is a high consolidation, prices grind sideways not far off their new
highs while traders digest their implications.
The longer a high consolidation lasts, the more comfortable traders
get with those new price levels.
Back in early 2008, $18 silver seemed pretty high and overbought. While the silver-to-the-moon zealots
loved it, more prudent traders were concerned since silver often plunges even
faster than it rallies. Yet
today, since we’ve seen $18 silver on and off for a few years now, it
seems perfectly normal. Silver
doesn’t feel overbought at all at $18, we’ve been conditioned to
accept this level.
This base has been established over a long time, either since late
2009 or early 2008 depending on your perspective. The longer that a particular price
level bases in a fundamentally-driven secular bull, the more powerful the
inevitable rally out of that base.
Since the stock panic was an ultra-rare once-in-a-century anomaly,
silver’s base extends back to 2008 in my book. But if you want to be more
conservative and consider it only relevant since late 2009, that is still a
long basing period.
Remember, silver follows gold. Back in February 2008 when silver
pierced $18 initially in this bull, gold averaged $926. Last month (July 2010) when silver
averaged $18, gold averaged $1192 (29% higher). So as I’ll discuss after the
next chart, silver’s high basing in the face of strong gold prices
makes it look even cheaper today.
This high base is the perfect springboard for a major silver rally.
There are some other bullish technical developments beyond this long
high consolidation to note.
First, silver’s key support zones are converging today. Its recent recovery-support line since
the panic has just hit its old pre-panic high-consolidation support
line. For technically-oriented
traders who pay attention to these things, and most silver-futures traders
do, a convergence of major support lines is a powerful incentive to buy. Right in time for the autumn rally!
More importantly, check out rSilver’s position in its horizontal
range. Considered as a multiple
of its 200dma, over the past 6 years or so silver has tended to run between
0.96x its 200dma when it is oversold and 1.40x when it is overbought. The last time rSilver traveled in the
upper half of its long trading range was way back last autumn. Languishing at an average under 1.04x
so far this month, silver is low in its range and near-oversold today. It’s been a long time since
silver has seen any excitement.
The best time to buy anything is when traders aren’t excited
about it, when it is low relative to its 200dma. And thanks to this year’s summer
doldrums, rSilver has been grinding ever lower on balance since spring. To see silver mired in bearish
sentiment, and hence low technically, right before the usual strong autumn seasonal factors kick in is exceptionally bullish. If silver was overbought instead,
stretched well above its 200dma, too much greed could lead to a correction
fighting against autumn seasonals.
But this isn’t the case today. As we exit the summer doldrums and
head into gold’s strong autumn, rSilver is near the oversold end of its
secular trading range and traders aren’t excited at all about this metal. Meanwhile silver has been
consolidating high for at least a year and building a strong base from which
to launch its next big rally to new bull highs. On top of all this, the recovery
support line has converged with silver’s high-consolidation support. Together these facts create a great
environment to be long silver.
Way back in the heart of the stock panic, we bought silver stocks
aggressively and encouraged our subscribers to do the same. Why? Silver was radically undervalued relative to gold. Since then, I’ve advanced this argument several times using the Silver/Gold Ratio. Prior to the panic silver traded in a
definite range relative to gold.
The panic anomaly blew that apart as risky silver plummeted much
faster than much-safer gold. But
ever since that panic, silver has been gradually recovering relative to gold.
This next chart highlights the state of the Silver/Gold Ratio today,
another powerfully-bullish driver for silver this autumn. Since the silver price divided by the
gold price yields a difficult-to-parse small decimal, I prefer dividing gold
by silver and then inverting the axis
to get an easier-to-understand proxy for the SGR. This SGR is rendered in blue on the
right axis, while the raw silver price is slaved to the left in red.
For years prior to that stock-panic anomaly, the SGR was actually
climbing higher in a secular uptrend.
And this makes sense.
Strong gold prices get traders interested in leveraging the
precious-metals bull in silver.
So the longer a gold bull persists, and the higher it runs, the more
traders want silver exposure. And
the more traders bidding silver higher, the faster its price rises. Since silver is such a tiny market
compared to gold, as a gold bull matures silver gradually gains ground
relative to the gold price.
Between January 2005 and August 2008, the time of normalcy before all
the wild dislocations the panic spawned, the SGR averaged 54.9x. An ounce of silver traded for about
1/55th the price of an ounce of gold.
In addition, silver had a correlation r-square with gold of 95% over
this span! In other words, 95% of
the daily price action in silver was directly explainable statistically by
gold’s own price action. This was the
normal precious-metals secular-bull environment.
But when highly-speculative silver plunged far faster than gold during
the panic, this relationship was blown apart. Between September and December 2008
when the extreme the-sky-is-falling panic psychology reigned, the SGR
averaged a dismal 75.8x. At worst
at the panic’s nadir, it easily hit its lowest point of the entire
secular bull (1/84th the price of gold!). And in correlation terms silver
started following the US stock markets rather than gold, its r-square with
the yellow metal fell to an unbelievable 53%.
Now if you’ve studied silver’s historical relationship with gold, even in the bowels of the panic it was
crystal-clear this anomaly couldn’t be sustained. It was the best opportunity of this
entire secular bull to buy silver stocks, so we and our subscribers did
aggressively. And time has
vindicated our hardcore contrarian stance then, as silver has indeed been
recovering relative to gold since.
From January 2009 to today, the SGR has regained a 66.4x average. And silver’s correlation
r-square with gold is back up to 89%, nicely returning towards historic
norms. But I don’t believe
this post-panic recovery is over yet.
Remember that silver is highly-speculative, and thus exceptionally
sensitive to prevailing sentiment in the financial markets. And ever since the panic, widespread
fear and anxiety have continued to dominate. This ugly environment has slowed
silver’s recovery relative to gold, but not stopped it.
Depending on where you want to measure it from, silver’s
undervaluation relative to gold today runs somewhere from substantial to
enormous. Ever since this
post-panic recovery got underway in earnest in early 2009, the SGR has been
recovering in the uptrend rendered above. Today the SGR is down low near its
support, silver is unloved thanks to the summer doldrums. But if the SGR merely climbs back up to
resistance, we are looking at an SGR of 58x or so.
At $1200 gold, this yields a silver price of $20.70. But gold tends to rally in the autumn,
and is set up beautifully this year (low in its relative trading range, near
its 200dma). At $1300 gold, a 58x
SGR yields a silver price approaching $22.50. But for a variety of reasons, I think
merely using this SGR recovery uptrend’s resistance line is far too
conservative. Ever since the
panic, I’ve argued that silver ought to at least regain its old secular pre-panic average SGR near 55x.
At $1200 and $1300 gold, this yields “fairly-valued”
silver prices around $21.75 and $23.50.
Of course these are well into new-bull-high territory, as silver
achieved its best level of this secular bull ($20.77) back in March
2008. And you better believe that
as soon as silver surges to new bull highs, interest in buying silver stocks
is going to soar. Probabilities
are high that we’ll see new bull highs in silver this autumn.
For me, a return to the old pre-panic average SGR is plenty bullish
enough. But for some investors,
silver is a religion. They hold
nothing but physical silver and silver stocks, and their whole financial future
revolves around a silver moonshot.
While not being diversified is extremely
risky, this all-or-nothing bet on silver is common enough to throw out some
optimistic projections for these silver zealots.
Check out the SGR’s old pre-panic secular uptrend rendered
above. Today its support extends
to 46x and its resistance to 35x.
Remember the longer a precious-metals bull persists, the more traders
get interested in silver and the higher it is bid relative to the gold price.
So it is probable at some point, though almost certainly not this autumn, that the SGR will
re-enter this pre-panic trend. If
you plug a 46x or 35x SGR into a reasonable gold price in the coming years,
you get some silver-price projections that will make even the raging bulls
smile.
Back to a more reasonable 55x in the near term, $1200 and $1300 gold
projections are conservative. On
average seasonally, gold rallies about 5% between mid-August and late
September and then another 12% between late October and late February. Together these rallies average around
14% in the autumn and winter buying season. If gold rallies 14% this year from its
recent late-July low, we’d be looking at $1325 before next spring.
Heck in last year’s autumn rally, which was admittedly quite
exceptional, gold soared 31% between late July and early December. A similar rally this year, which
I’m not betting on since its odds aren’t great, would push gold
up above $1500! Even at the
pre-panic average 55x SGR, this would yield a silver price around
$27.25. And even if we
don’t see this until autumn 2011, the appreciation potential of silver
stocks is vast thanks to
silver’s continuing post-panic recovery relative to gold.
So while gold and hence silver seasonals are always bullish in autumn, this year looks like
it has greater potential than normal.
Silver has been basing for a long time getting traders comfortable
with $18ish levels. It looks cheap
technically trading near its 200dma and sentiment, while not exactly rotten,
is certainly still totally bereft of any greed or excitement. On top of all this, silver remains very undervalued relative to gold, and
is even trading near support in its post-panic-recovery SGR uptrend. What an explosive setup heading into
autumn!
At Zeal we are riding this big-autumn-silver-rally potential in
investments and speculations in elite silver stocks. You ought to join us. We sold many of our short-term silver-stock
trades near highs before the summer
doldrums hit, then we started redeploying for autumn this week in our weekly Zeal Speculator newsletter.
It
should be a very profitable campaign.
We’ve done extensive fundamental research to narrow down the
silver-stock universe to our favorites, which we profile in comprehensive reports. We also publish an
acclaimed monthly newsletter, Zeal Intelligence. In it
I analyze the financial markets looking for high-probability-for-success
trading opportunities in commodities stocks. Subscribe today and get back in the game of growing your capital!
The bottom line is silver looks very bullish heading into autumn
2010. Big seasonal gold-demand
spikes are approaching, and rising gold prices get traders excited about
silver. After consolidating high
and forming a strong base for at least a year, silver has the perfect
springboard from which to launch to new bull highs. Couple this with converging major
support lines, near-oversold technicals, and little enthusiasm today, and
silver is perfectly positioned for a fast ride higher in the coming months.
Overarching all these bullish silver technicals is this metal’s
continuing panic-driven undervaluation relative to gold. Until this valuation gap is fully
closed, silver has a lot of ground to regain and thus should rally faster on
balance to catch up. Thanks to
all these bullish influences, this year’s big autumn silver rally
certainly has the potential to surprise on the upside. And silver stocks will naturally soar
if all this comes to pass, creating a great opportunity for traders today.
Adam Hamilton, CPA
Zealllc.com
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information.
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