The unprecedented
financial turmoil plaguing all markets these days is dominating everyone's
attention. In a troubled time when the flagship S&P 500 stock index can
plunge 30.0% in a single month, it is hard to think about anything else. Thus
many smaller markets, like silver, are languishing in relative obscurity.
Silver, an asset
which many investors thought would thrive during a financial-market panic,
has been scourged mercilessly. After briefly surging above $20 in March, it
nonchalantly traded between $16 and $19 or so for the next 5 months. Silver
was on top of the world, consolidating high, and all looked well.
But since early
August, the global financial panic has radically reshaped the silver
landscape almost beyond all recognition. So far in November 2008, silver has
averaged just $9.73 on close. The stocks of the world's biggest and best
silver miners, companies that held so much promise only 6 months ago, are now
down 80%+. It really feels like Armageddon for silver investors, a once
unthinkable living nightmare.
I've been a big
silver fan since this gold bull started in early 2001. I bought a lot of
physical silver back in the early 2000s and first formally recommended silver
coins (US 90% bags) to our subscribers as a long-term investment 7 years ago
this month when silver traded in the low $4s. Several of my core long-term
investments are elite silver producers. So as a long-time silver investor, I
am sure feeling the pain too.
Since silver has
fallen off a cliff and even its best producers have cratered, silver
investors and speculators are feeling tremendous anxiety. Me too, this crisis
situation is just unreal. Like so many things in these crazy markets, today's
horrific silver environment would've seemed impossible not too many months
ago. So this week I decided to take a look at silver in crisis and see what
insights we could glean.
To start, we need
some perspective. Despite what it may feel like, silver has not been singled
out. From early March to late October, silver fell 56.7%. Most of these
losses snowballed since mid-July, a span over which this white metal lost an
unbelievable 53.0%. This is terrible, no doubt. But realize over this same
period crude oil, the king of commodities, plunged 63.3%! Heck, even the
geometrically-averaged (hence very slow to move) Continuous Commodity Index is down 43.0% since early July.
Silver's losses are
not happening in a vacuum. They have been driven by exogenous forces far
beyond the usual small and insular silver market. The financial panic has
driven a wholesale deleveraging of all assets, including commodities. It is
crucial to keep this in mind. Considering silver technically in isolation,
ignoring these unprecedented times, will certainly lead one to draw the wrong
conclusions on its troubles.
And silver is unique
among commodities even in the best of times. Its small market size,
phenomenal historical price spikes, and fanatical following have forged it
into one of the most volatile and speculative commodities on the planet. While
its secular bull is indeed fundamentally-driven, inflows and outflows of
speculative capital have driven violent swings all around this core uptrend. Silver
has never been for the faint of heart, it takes no prisoners.
Because of this
heavy speculative component driving silver's wild gyrations, speculator
sentiment is disproportionately critical to silver's near-term fortunes. If
silver speculators are greedy and excited, silver can rocket higher like it
did in early 2008. But if silver speculators are fearful and scared, silver
can plummet like it did in recent months. Speculators' mood swings drive
silver's short-term price swings.
As I've traded
silver and silver stocks over the years, it has become clear that one factor
dominates silver-speculator sentiment much more than all other factors
combined. It is gold's performance. Gold is the king of precious
metals, its behavior governs sentiment for the entire PM complex. When gold
is strong, silver traders get bold and buy aggressively. But boy, when gold
is weak silver traders run for the hills.
In light of this
truth, and considering how universal this financial panic's impact has been,
we can't consider silver's behavior in isolation from gold's. Gold sets the
PM tone, and silver amplifies it. If you are the least bit skeptical of this,
I encourage you to study market history to investigate it on your own. I
wrote an essay last year, Silver Lagging Gold, that illustrates this strong tendency with 7
charts spanning nearly 4 decades.
Today's silver
crisis needs to be pondered in light of gold. It won't and can't make sense
in isolation given all the unprecedented financial-market extremes we've
witnessed in the last couple months. So in my technical charts this week, I
rendered silver (blue) on top of the gold price (red). This first one takes a
look at the past year or so in the precious-metals complex.
Silver started this
year strong, blasting 50.4% higher from December 2007 to March 2008 to
dazzling new multi-decade highs. On a nominal basis, silver hadn't been above
$20 since October 1980. And on a real inflation-adjusted basis, silver still hadn't exceeded $20 since March 1984.
So seeing silver above $20 this year was very exciting and a big deal in a
secular sense. Silver bulls were naturally ecstatic.
But note above that
during this early-2008 silver surge gold was also strong. Over this same span
of silver's rally, gold powered 24.6% higher. Gold was hitting a series of
all-time nominal highs of its own in early March when silver was over $20. When
gold is strong, silver speculators get excited and flood into the volatile
metal. So it leverages gold's gains, by 2.0x in the case of this particular
silver surge.
Unfortunately these
maturing PM uplegs were cut short by a surprise from the Federal Reserve. Instead
of slashing rates by 100 basis points on March 18th as the markets expected,
the Fed only cut by 75bp. It was still a huge cut, it still should have
hammered the US dollar. But provocatively the heavily oversold dollar started
rallying on the Fed's "restraint". Gold plunged and dragged silver
with it. By early May silver had fallen 22.3%, amplifying gold's own selloff
by 1.6x.
Then in much of May
and June, silver simply consolidated sideways. Note above that its daily
rallies and selloffs mirrored gold's closely, as usual. In early July gold
caught a bid and silver followed. But gold's rally wasn't all that large and
silver speculators weren't too convinced it was worth chasing. Silver only
rallied 18.6% over this span, merely amplifying gold's gains by 1.3x.
All today's silver
woes started in mid-July and accelerated into August and September. Between
$17 and $18 in late July, still in a typical mild summer-doldrums downtrend, silver looked solid. It wasn't until it broke
below $16 in early August that silver technicians started to get scared. And
indeed, if you considered silver in isolation it was plummeting down through
its key support zones like a mobster wearing cement shoes.
Between mid-July and
mid-September, silver plunged a breathtaking 45.5%! It was the worst selloff
of this entire silver bull by far, as you'll see below. Speculators had to
abandon silver at a frightful rate to drive such an incredible sell-side
imbalance. Why did they flee? Because of gold's behavior. Gold was knifing
down through support zones too, which quickly turned sentiment deeply
negative in the entire PM realm.
Over this same span
of silver's brutal selloff, gold was down 19.9%. So silver leveraged gold's
decline by 2.3x. This is not far above the 2.0x leverage silver saw to gold
in early 2008 during its upleg. So while silver's behavior was terrible in an
absolute sense, relative to gold it wasn't beyond the pale. Interestingly
this comparison is even a bit skewed thanks to gold bottoming 3 days before
silver in September.
If you optimize this
mid-July-to-mid-September decline to the exact days of gold's swing instead
of silver's, the silver-to-gold leverage ratio looks even more normal. Silver
fell 44.5% to gold's 23.8%, a solidly normal 1.9x. While I am certainly not
trying to downplay the magnitude of this silver crisis, realize that relative
to gold's decline silver's selloff wasn't atypical at all. Silver amplifies
gold's behavior, to both the upside and downside.
This begs the
question, if gold killed silver speculators' sentiment then what happened to
gold? The unprecedented global financial panic, first in bonds and later in
stocks, drove one of the fastest and largest US dollar rallies in history. Foreign
investors rushed to buy US Treasuries to protect their capital, and they had
to buy dollars first. Gold futures traders saw this huge dollar surge and
sold gold aggressively. I wrote an entire essay on this particular unique gold/dollar event last
month if you want more background.
Out of
mid-September's lows, silver surged following gold. On September 17th, gold
rocketed 11.1% higher in its biggest single-day rally since January 1980. Silver
speculators naturally loved this, bidding silver 15.2% higher that day. By
the time this rallying spell ran its course in late September, silver was up
29.3% which leveraged gold's own gains by 1.8x. But although the bond panic
into dollars had abated, the stock panic into dollars was just starting. The
dollar surged, gold fell, and silver plunged again.
Between late
September and late October, the white metal fell another 33.3%. It was
amazing, earlier this year I never thought we'd see silver in the $8s again. Nevertheless,
despite silver's atrocious absolute levels it only leveraged gold's own
decline over this span by 1.8x. No matter how ugly silver looks in isolation,
compared to gold (its primary driver) silver's recent selloff was not out of
proportion.
Now that you've
considered all silver's big swings over the past year, look at this chart
again as a whole. All silver has done in going from $14 to $21 to $9 is
follow and amplify the underlying moves in gold. Silver's daily and multi-day
rallies/selloffs in this chart mirror gold's exceedingly well, as usual
fitting like lock and key. Technically, silver is merely gold's little lapdog
as it always has been. Without gold strength to ignite silver speculators'
greed, silver can never rally for long on its own.
Silver's only
problem since August was gold. And a big part of gold's problem was a
giant contraction in speculative capital deployed. Due to forced redemptions,
margin calls, and sheer fear, traders all over the world pulled capital off
the table. Their selling forced virtually all prices lower. Unfortunately
gold was not an exception this time around, as it should have been during a
full-blown panic. And with gold weak, silver didn't stand a chance.
In recent weeks,
angry and shell-shocked silver enthusiasts have been looking for a villain to
blame. While conspiracy theorists from various factions will shrilly disagree
with me, I don't think there is a silver-specific culprit to tar and feather
for the extraordinary chaos of the past few months. Gold got crushed and
silver followed and amplified gold as it always ultimately does. End of
story.
But one thesis today
suggests mainstream stock investors added to this silver plunge by dumping
their holdings in the SLV silver ETF. Last week I investigated this claim for gold made
by opponents of gold's ETF, and they were groundless. I was curious about SLV
so I checked out its holdings. The results will be very surprising to many
and suggest stock investors buying SLV are much stronger hands than expected.
While speculators
abandoned silver since mid-July, stock traders owning SLV didn't really
succumb to this irrational panic. SLV's total holdings, amazingly enough,
actually grew and hit new all-time record highs during the silver
crisis of recent months! A steep uptrend in SLV's bullion holdings that began
during the sharp early-2008 upleg somehow held intact through the brutal
late-2008 correction. The silver ETF actually helped retard silver's
selloff!
SLV holds silver in
trust for its investors. Its mission is to track the silver price. This only
happens naturally if SLV supply and demand trends are very similar to
underlying silver supply and demand trends. If relatively more SLV is
demanded than silver, this ETF must issue shares and use the proceeds to buy
physical silver to equalize this demand differential. The opposite is also
true, SLV must sell silver bullion and buy back shares if SLV selling
pressure exceeds that in silver futures. If these mechanics aren't clear to
you, I explained all this last week for GLD. SLV works the same way.
If SLV and silver
always had the same supply-demand pressures on a minute-by-minute basis,
SLV's holdings would never need to change (outside of the modest annual
management fee). SLV's holdings only grow when SLV demand exceeds silver's
and only shrink when SLV supply exceeds silver's. Since SLV still grew its
holdings even while silver cratered, SLV buying pressure in recent months was
greater than the selling pressure driven by silver's collapse. This is
incredibly impressive.
SLV has grown fast
during silver uplegs, grown slowly during silver consolidations, and has even
grown or remained stable during silver selloffs. Stock traders want to be
able to get silver-price exposure via their usual stock-trading accounts, so
SLV demand has continued to grow despite silver's wild volatility. No matter
how you feel about metals ETFs personally, you can't argue that SLV
contributed to silver's recent weakness. This ETF actually had to buy
physical silver during this futures-based selloff!
Whenever you analyze
silver it always comes down to gold in the end. If gold is strong enough for
long enough, silver will explode higher as speculators flood in to drive one
of its characteristic parabolic spikes. If gold is drifting in a
consolidation, silver will dutifully follow in a sideways grind of its own. And
if gold sells off, silver speculators will abandon silver in a heartbeat
without thinking twice. Gold is the key.
I fully know silver
is a religion for some investors who will own nothing else but this metal,
its producers, and its explorers. More power to them, silver is definitely
very exciting and exceedingly lucrative when it rockets higher. This being
said, silver is still at the mercy of gold. This final bull-to-date chart of
gold and silver, from my multi-decade study of this relationship, offers some important
lessons.
Yes, silver has
awesome potential. Yes, its secular bull has already carried it from around
$4 to nearly $21 at best. Yes, investors and speculators in silver including
me and our subscribers have made fortunes trading it and its producers. All
this is true, there are many reasons to love silver going forward. Yet
ultimately, silver is slave to gold. It is a hyper-volatile speculation that
amplifies gold-driven PM sentiment.
In silver's bull to
date, literally all of its gains have come from just 3 fast uplegs. Silver's
bull really didn't begin in earnest until early 2003, about 5.5 years ago and
about 2 years after gold's own bull began. Out of 22 calendar quarters of
silver bull, silver only gained big on balance in about 7 quarters. Note
above that all 7 of these big silver quarters, distributed across 3 mighty
uplegs, happened when gold prices were strong.
Silver is strong
only after gold is rallying high enough for long enough to ignite excitement
in precious metals. When gold consolidates and excitement bleeds away, silver
is weak. And when gold corrects, silver amplifies gold's downside moves
quickly and efficiently. So when gold succumbs to rare extraordinary
weakness, any prudent silver investor or speculator will expect silver to
suffer even more.
And although the
global loss of confidence in all speculations drove silver's biggest
correction of this bull by far, I also wanted to point out that extreme
silver declines are par for the course from time to time. In early 2004,
silver plummeted 32.8% in 24 trading days. In mid-2006, silver plummeted
35.1% in 23 trading days. So its 2008 selloffs of 22.3% in 40 days and 45.5%
in 45 days aren't too out of character. Indeed, 40+ day declines for silver
are actually a slow pace for a sharp selloff!
Silver always has
been very volatile and always will be. Since it is such a small market with
so much exciting history and such a fanatical following, speculators will
continue to exert an outsized influence on silver. And if the last 4 decades
of history continue to hold true, as I suspect they will, the biggest single
factor influencing silver sentiment by far will be gold's own price performance.
Gold is the key to silver.
So if you believe in
gold's long-term fundamentals, that its secular bull will continue to power
higher on balance for years to come due to increasing investment demand,
shrinking mined supply, and incredible fiat-paper inflation worldwide, then
there is nothing to fear in silver. Silver will follow, and amplify, gold in
the end. Yes silver is in crisis today, it has been eviscerated technically. But
this is an anomaly.
Flight capital
desperately buying US dollars to buy US Treasuries to escape a
once-in-a-generation global financial panic drove a massive and fast dollar
rally. Futures traders saw this and sold gold and other commodities
aggressively. Naturally silver fell as gold sentiment imploded. And relative
to gold's extreme decline, silver's selloff was not outsized. It was just
about right given the magnitude of this anomaly.
At Zeal we've
certainly been beaten up by this silver selloff too. Our long-term
physical-silver and silver-stock investments were driven to brutally-low
levels I never thought we'd see again. Despite this intense pain, this
financial panic too will pass like all before it. As soon as confidence
returns to the financial markets, probably driven by a major stock-market rally, capital will return to the commodities realm. Gold
will benefit greatly and silver will follow it higher as always.
We actually took
advantage of this carnage to add a new long-term investment position in an
elite silver miner we've long wanted to own. Details are in the current issue
of our acclaimed monthly newsletter. If you watched silver soar from $11 in summer 2007
to $21 in March, and wished you could've gotten into silver stocks on the
ground floor, today's anomaly is a very rare second chance. Subscribe today and don't miss this incredible opportunity.
The bottom line is
silver has indeed been slaughtered. It hurts. But despite unbelievable
technical carnage, silver's plunge was not unreasonable given the size of
gold's own selloff. As a highly-speculative asset even in the best of times,
silver's poor performance during a peculiar panic episode when all
speculations were shunned should not be too surprising. Speculators simply
abandoned it.
While extreme times
can drive extreme price levels, realize that financial panics never persist for
long. While silver probably won't hit new bull highs soon after rationality
returns, its fundamentally-driven equilibrium price is probably up in the
mid-teens at worst. That's much higher than today's levels! As
financial-market confidence returns, and gold's bull resumes, silver's crisis
of confidence will end too.
Adam Hamilton, CPA
Zealllc.com
November 21, 2008
So how can you profit from this information? We
publish an acclaimed monthly newsletter, Zeal Intelligence, that details exactly what we are doing in
terms of actual stock and options trading based on all the lessons we have learned
in our market research. Please consider joining us each month for
tactical trading details and more in our premium Zeal Intelligence service at
… www.zealllc.com/subscribe.htm
Questions for Adam? I would be more than
happy to address them through my private consulting business. Please
visit www.zealllc.com/adam.htm for more information.
Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually
increasing e-mail load, I regret that I am not able to respond to comments
personally. I will read all messages though and really appreciate your
feedback!
Copyright 2000 - 2006 Zeal Research (www.ZealLLC.com)
Information contained herein is obtained from
sources believed to be reliable, but its accuracy cannot be guaranteed. It is
not intended to constitute individual investment advice and is not designed
to meet your personal financial situation. The opinions expressed herein are
those of the author and are
subject to change without notice. The information herein may become outdated
and there is no obligation to update any such information. The author, 24hGold, entities in which they have an
interest, family and associates may from time to time have positions in the
securities or commodities discussed. No part of this publication can be
reproduced without the written consent of the author.
|