Why Thursday Could Be a Key Day for Silver...
Why Thursday Could Be a Key Day for Silver...
Tuesday, 18th June 2013 – Melbourne, Australia
By Dr Alex Cowie
Silver has been falling for the last two years.
But the thing about silver is that when it moves, it can really move. As we saw in 2008, a 50% loss can very quickly turn into a 150% gain.
And if I'm reading the market right, it looks as though a major 'whipsaw rally' in silver could be just weeks away...
Three different signals warning of a whipsaw rally have gone off in the last few weeks.
Before I get to them though, ask yourself how much you've heard about silver recently. Silver's really fallen off the radar, and 'market buzz' is as low as I can recall.
Alexa.com is a free website that lets you measure website traffic. And you can see here that silver website silverprice.org has fallen 90% over the last two years. I'm not singling out this website, which is in fact pretty good; it's a similar story for all silver websites.
No One is Looking at Silver Websites Any More - a Signal to Buy?
The point is this: silver is simply not on punters' radars any more. However, this is perfect, as that is usually the best time to buy something: before the speculative frenzy begins.
That's assuming a speculative frenzy happens of course, so let me explain why I think one is on its way.
A Bullish Outlook
First of all, the positioning in the futures market has shifted.
You see, futures traders have to declare what they are up to, and this is then reported in the Commitment of Traders (COT) report. And this COT report has been a great way of picking major turning points in the past.
The thing that stands out right now is that commercial traders are net short just 5,000 contracts, the smallest net short position I can recall. Just six months ago it was a massive 60,000, but it has shrunk rapidly.
These commercial traders include the big banks and the big producers. No one has a better view of the market than them, and it's hard to say why they'd be positioned like this - that is unless they are expecting higher prices.
Secondly, the technical charts are peppered with bullish signals as well.
First off, the silver price has now carved out a 55% fall since peaking in April 2011. This is comparable to silver's fall during the 2008 crash. And as painful as that move was, it set silver up for a 2.5 year rally that saw the silver price increase five-fold. The chance of something similar happening again is increasing.
Silver - Technicals Looking Good for a Turnaround
The recent fall in silver also brings it to the same moving average line (350 week, in blue) as during the 2008 crash. The other supporting technicals look good too.
The RSI (above the main chart) is extremely low, and you can see that in the past this has been a good signal for the next rally. The same thing goes for the MACD (below the main chart). Let's just say the silver charts have got my full attention.
The third big reason to expect a new bull-market in silver is the ratio of the gold price to the silver price.
Another way to think of this 'gold-silver ratio' is that it is the number of ounces of silver it would take to buy an ounce of gold. So, when the ratio is high, it means silver is relatively cheap.
Right now, silver is so cheap that the ratio is at a three-year high.
It doesn't tend to stay this cheap for long. For example, the last time the ratio was this high was in August 2010. And this was RIGHT before silver broke out and rallied 170%, from $18/ounce to peak at $49/ounce in just nine months.
With the mega-bullish futures positioning, the soaring gold silver ratio, and the red-hot technicals, as well as the sheer lack of interest in silver, in all, it's a pretty compelling set up.
The last time I saw the stars line up like this I went out and bought my first silver. Funny thing is, over a beer I was telling a hedge fund buddy about my bet.
A year later I found out he had thought there was something in it, and after further research had taken a position. But whereas I bought a few grands worth of the metal, he took a multi-million dollar position for his fund. He made out like a bandit on that trade, and got a pretty tidy bonus!
Silver is a cruel mistress though, and likes to make a mockery of investment theories. Many people far smarter than me have been calling silver up for the last few years, only to see it continue to tumble.
Watch This Key Announcement
My message here is that if you buy silver today and expect it to be up next month, you're more likely to be disappointed that not. But if you are still holding in 2-3 years time, then I think you will be sitting on a 100-200% gain from this level. This is why I'm still sitting on our 'family silver'.
As for when exactly it could turn, it's impossible to say. Market timing is a dark art, but in a market gruesomely distorted by major central bank policy, it is nigh on impossible.
It's a big week for the central bankers too. The Fed meets tomorrow (Thursday morning for Australians). The prospect of the Fed tapering the QE program has got the markets super- twitchy.
So much so, that last night the markets swung wildly simply on the back of a Financial Times story about the Fed tapering. And last week, it was a story in the Wall Street Journal that did it.
If the Fed backs off from tapering talk, expect to see a jump in gold and silver. I think they have to back off. US data is still too weak to take the stabilisers off, and the Fed has witnessed the abject chaos they have caused globally by testing the water with Bernanke's trial suggestion of tapering QE.
US bond yields have risen, emerging markets have crashed, and major currencies have moved more in a night than a typical month. Not happy Ben.
So keep an eye on markets on Thursday morning. It should be a decisive turning point one way or the other. And it should mark a decisive turning point for silver too.
Dr Alex Cowie+
Editor, Diggers & Drillers
From the Port Phillip Publishing Library