Adam Hamilton October 25, 2013 2899 Words
Silver has suffered a rough year, but its fortunes are changing. In recent months its price has firmed at the convergence of multiple major support zones, a powerful technical launchpad. Silver has soared in parabolic uplegs from the handful of similar past convergences, a very bullish omen. And with silver languishing so low in its trading range relative to gold, it has enormous potential to catapult far higher soon.
After plummeting a brutal 39% in the first half of 2013, silver naturally remains deeply out of favor today. Investors donít want to touch it with a ten-foot pole, convinced silver will soon roll over to plumb ugly new depths. Investors as a herd always hit peak bearishness after exceptionally-large selloffs, extrapolating the downtrend continuing indefinitely. But when major lows are witnessed is exactly the wrong time to be bearish.
Silverís bullish price action since late June yet again proves this truth. As 2013ís anomalous gold plunge dragged silver down near $18.50 less than 4 months ago, bearishness was overpowering. Investors and analysts fell all over themselves to forecast much lower silver prices. But instead silver surged out of that ubiquitous despair, blasting 33% higher in just 2 months. Excessive bearishness bred a major reversal.
And though silver retreated in September, any short-term chart shows its young rally remains very much intact. Since late June, this white metal has carved a very definite uptrend. Its series of higher lows defines the first major support zone that is converging into silverís technical launchpad today. But though this support line confirms a new upleg is indeed underway, it is the least important support zone by far.
The support Iíve been watching with great interest in recent months is secular, much older and stronger. Despite 2013ís ugly selling anomaly, silver remains in a secular bull market. Born way back in November 2001 when silver languished just above $4, it catapulted silver an astounding 1105% higher at best by April 2011! Silver just bounced up from this bullís same support line that birthed its mightiest past uplegs.
This first chart offers a much-longer-term perspective on silver than most market websites, extending back to 2005 when silver still traded with a $6 handle. Remember that bygone era? Even with this metal so deeply out of favor near major lows today, it is still up 233% since 2005 dawned! The benchmark S&P 500 stock index only rose 44% over that same span. Silverís bull market is still proving wildly profitable.
Silverís 2013 selling anomaly had absolutely nothing to do with this metalís fundamentals, it was solely collateral damage from goldís own selling anomaly. Gold was crushed when the Fed-driven levitation in the general stock markets sucked capital out of the flagship GLD gold ETF, which was forced to dump record amounts of gold bullion. The resulting gold weakness ignited a handful of ultra-rare futures forced liquidations.
While silver certainly has its own bullish fundamental merits, technically it trades in lockstep with gold prices. Investors buy silver when gold is strong, and sell it when gold is weak. So silver prices tend to amplify whatever is happening in gold. Over the dozen years since silverís secular bull was born, its daily price action has had a 92% r-square with goldís. Over 11/12ths of all silver action is statistically explainable by goldís!
So no silver discussion is complete without considering gold. Brutal silver corrections only happen when gold is exceptionally weak, and big silver uplegs only run when gold is also rallying in parallel uplegs of its own. This silver-launchpad concept of major support zones converging today is impossible to fully understand without considering goldís impact on the equation. Gold ties in intimately with silver support approaches.
Just 4 months ago in late June when silver scraped $18.50, it hit the major secular support line rendered above. This line extends back nearly a decade, even beyond the 2005 origin of this chart. Though old and strong, silver rarely hits this powerful secular support zone. The last time was early 2010, before that during and after 2008ís epic stock panic, and before that way back in 2005. All these events were very bullish.
After each time secular support was hit, silver almost immediately started climbing relentlessly in what would grow into its biggest uplegs of its entire secular bull! And just like silverís 2013 secular-support approach, the prior times also happened after massive corrections when silverís price had fallen well behind goldís own. Silver recently bouncing off this secular support line is its most bullish omen in years.
Gold and therefore silver have always tended to drift sideways to lower during the summer doldrums, a period of weak demand seasonally. That was the case in August 2005 when silver slumped below its secular support line. But out of that same technical support zone silver just bounced off of this summer, it soon rocketed 124% higher in well under a year in one of this white metalís signature parabolic uplegs.
When any price rockets as fast as silverís does when investors favor it, greed and euphoria soon burn themselves out and that price collapses. Indeed silver soon plummeted by over a third in just a month in June 2006, which is simply par for the course in the volatile silver realm. But that again hammered silver down near its secular support line, from which silver launched into another massive 114% parabolic upleg.
That peaked just under a couple years later, in March 2008. Silver then corrected and consolidated, but soon got sucked into the most extreme fear event weíll ever witness in our lifetimes. 2008ís once-in-a-century stock panic was an epic fear maelstrom that even sucked in gold, which naturally led to a frantic flight out of silver. In just a matter of months, the silver price had plummeted a gut-wrenching 57%!
Back in late 2008 and early 2009, much like in June and July this year, silver sentiment was dominated by the worldview that this metalís secular bull market was dead. Traders extrapolated silverís exceptional and inherently-unsustainable panic-driven selloff as something that would persist indefinitely. But as all contrarians know, consensus is always wrong at major highs and major lows when greed or fear get too extreme.
Silver had even been bashed below its secular support by the stock-panic selling, something we saw to a smaller extent this year in June and July. But back then, like today, silver prices had fallen way behind goldís. Silver is something of a sentiment indicator for gold, because it gets overbought and surges ahead when gold is particularly strong. Then when gold is exceptionally weak, silver gets oversold and falls behind.
The close relationship between silver prices and gold prices is best understood with a simple ratio, the Silver/Gold Ratio. The SGR divides the daily silver price by the gold price. Back in early 2009 just after the stock panic, when silver was still trading in the $12s, I used the SGR to argue that silver was due for a major upleg to catch back up with the gold price. And that contrarian forecast proved dead right of course.
Silver would ultimately skyrocket a mind-boggling 443% higher over the next 2.4 years, as a normal upleg ballooned into a euphoric parabolic blowoff! Check it out on this chart in late 2010 and early 2011, it was utterly amazing. Since silver is such a tiny market in the grand scheme of things, every upleg has the potential to evolve into such a super-rally. Silverís extreme volatility is the main reason it is so enticing.
When silver really starts regaining favor again in a big way, the flood of investor capital deluging in far outstrips any near-term supply. So silver explodes parabolically until greed and euphoria burn themselves out, which happens when all potential near-term buyers have already bought in. While great fun, the cost of such parabolic explosions is exceptionally long and deep corrections afterwards to rebalance sentiment.
Thus silver corrected sharply into mid-2012, when this metal would have bottomed in normal markets. But the Fed-QE3-driven levitation in the general stock markets soon started to attract most capital away from all alternative investments, including gold. This led to the extraordinary self-feeding gold selloff that snowballed into 2013ís anomalous plunge. And by late June, that had dragged silver back to secular support.
Just like at past major secular-support approaches, silver prices had fallen well behind goldís. This is readily evident in this chart. And the combination of silver hitting its secular support, bouncing up off of it despite extreme prevailing bearishness and despair, and falling behind gold is incredibly bullish. Even if we ignore that epic 2011 upleg, the average silver upleg emerging out of similar conditions was still stupendous.
Silverís 2006 and 2008 uplegs weighed in at an average gain of 119% over an average duration of just 1.2 years. Once silver starts running, it tends to move pretty fast. If silver merely experiences a similar upleg out of its recent late-June low, it would power up near $41 by late next year! And since that doesnít require silver to start regaining favor among mainstream investors, just contrarians, it is a conservative target.
Provocatively that also coincides with silverís secular resistance line, which will also hit $41 by later next year. Both silverís 2006 and 2008 uplegs failed at this resistance zone, and the 2010/2011 one nearly did too until the whims of prevailing psychology ignited that parabolic feeding frenzy. So silver exceeding $40 again by sometime next year is an easy bet, simply an average upleg after a secular-support approach.
There is a third support zone involved in todayís silver-launchpad convergence that is the most important of all, and it is in that Silver/Gold Ratio. This next chart looks at the SGR, or technically the inverted Gold/Silver Ratio (the same thing) since the SGR yields tiny hard-to-comprehend decimals. It reveals silver has also converged at multiple key support zones relative to gold, which has always been silverís primary driver.
For years before 2008ís once-in-a-lifetime stock panic, the SGR averaged 54.9x. An ounce of silver was worth about 1/55th of the price of an ounce of gold. This average was derived from SGR action that forged a strong trading range between 60x on the low side and 45x on the high side. When silver was out of favor its price tended to fall to 1/60th the price of goldís, and then rose to 1/45th when it was in favor.
Note that today the SGR is right at the bottom of its pre-panic range, with silver trading near 1/59th the gold price this week. That 60x line is major support for silver relative to gold, both before and since the stock panic. While the SGR was pummeled to absurdly-low extremes by the panic, which I correctly pointed out at the time was wildly bullish, silver indeed soon recovered fully relative to the price of gold.
Even before silverís 2010 upleg shot parabolic in early 2011, the SGR was already back up high into its pre-panic trading range. Then with even mainstream investors starting to plow capital into the tiny silver market, its price skyrocketed so fast that it was soon hitting a bull-high SGR of 32x. While that was an overbought anomaly that couldnít last, which I warned about just beforehand, the SGRís trading range still held.
As silver corrected sharply in 2011, the SGR remained right in the middle of its pre-panic trading range. That action, which often corresponded with very bearish silver sentiment among traders, reestablished the validity of the pre-panic SGR range of 60x to 45x in this post-panic world. And as of this week, the post-panic average SGR is 57.3x, which isnít too far from the long-standing pre-panic average of 54.9x.
So for nearly a decade, any time silver has traded around 1/60th the price of gold it is simply too cheap relative to its dominant driver. A 60x SGR indicates silver is out of favor, sentiment is too pessimistic and bearish. And out of such conditions, major silver uplegs are born. All of the uplegs in silverís secular bull ignited when silver was undervalued relative to gold as revealed by a low SGR. And today weíve got one again.
In addition to silver being right at its powerful 60x SGR support now, it is also at a separate ascending post-panic SGR support line. This is a fourth major support zone converging today! It was right off this same line back in late-summer 2010 when the biggest upleg by far of silverís secular bull started marching higher. With silver right at so many major support zones, the odds are overwhelming a young upleg is underway.
While silverís secular technicals gave this white metal a $41 target, the SGR is even more bullish. Silverís next upleg should easily see it regain enough favor among investors to hit the upper resistance of the SGRís range, 45x. At todayís $1350 gold that is only $30, but it is still about a third higher than todayís out-of-favor silver prices. But gold itself is due to head much higher too in a massive mean-reversion rebound.
Sentiment is so suffocatingly bearish in the precious-metals realm this year that the vast majority of investors have no idea how anomalous 2013ís gold prices are. In 2012 which was by no means a strong year for gold, the yellow metal still averaged $1669! So seeing $1650 again as the GLD mass exodus reverses and speculatorsí gold-futures longs and shorts normalize again is nothing, all but guaranteed.
At $1650 gold and a resistance-level SGR of 45x, silver would approach $37 which is 2/3rds higher than todayís levels. And of course the higher gold goes, the more bullish silverís outlook becomes. If gold retests its August 2011 bull-to-date high near $1900, which is very likely as the Fed continues to aggressively monetize Treasuries, a 45x SGR would put silver above $42. Thatís about 7/8ths higher than today.
But such epic bearishness and universal despair converging with four major support zones in recent months means it wouldnít be a surprise at all if silver breaks out of its SGR trading range. Market sentiment is like a giant pendulum, the farther it is stretched in one direction the more momentum its counterswing has to the opposite extreme. So there is another SGR target that is intriguing, its pre-panic support.
Before 2008ís wildly-anomalous stock panic, this support line never failed. The SGR not only regained it in early 2011 as silver roared back into favor with investors, but it surged far above it. Today this old SGR support zone is up near 38x, and is climbing by about 3 points per year. So a year from now, about the average time for a major silver upleg, it will be up near 35x. This in-favor scenario is super-bullish for silver.
At the same $1350, $1650, and $1900 gold levels, a 35x SGR implies silver prices near $39, $47, and $54 respectively! The potential silver gains from here as silver eventually migrates from deeply out of favor to some degree of relative in-favorness again are enormous. And silver will absolutely return to favor in the coming years, as the markets are forever cyclical. Any sentiment extreme next yields to the opposite one.
And as silverís young new upleg first mean-reverts higher then later soars as investors start chasing silver again, the hyper-oversold silver-mining stocks are going to soar. Silverís gold-driven 2013 selling anomaly was so spectacular that elite silver stocks plummeted to insanely-low valuations, some even with unheard of single-digit price-to-earnings ratios. Silver stocks have never been so cheap relative to silver!
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The bottom line is silver today looks to be on a powerful technical launchpad. Despite extreme fear and despair near its brutal late-June lows, silver bounced off the confluence of multiple major support zones and has been rallying on balance ever since. It remains out of favor and way too low relative to gold, which gives silver enormous potential to far outpace goldís advance as the precious-metals uplegs accelerate.
As always emerging out of hyper-bearish major lows, mainstream investors havenít caught on. You wonít be hearing about silverís new upleg on CNBC until its lionís share is already past and the big easy gains have already been won. But for the brave contrarians willing to buy low when few others will, the bullish implications of todayís silver support convergence offer an exceptional opportunity to get in early and cheap.
Adam Hamilton, CPA October 25, 2013 Subscribe at www.zealllc.com/subscribe.htm