I’ve been reading with great interest over the last month or so all the various articles on both the bear or bull side of the silver and to a lesser extent, the gold trade. Lately, the market has been flashing some signals that investors and market players need to pay attention to. What I am about to write is not a prediction of sorts but more of a guide as to what we “might” expect in the coming days or weeks in the silver market. (My guess is days and I will get into that a bit later).
Most of the talk I’ve been hearing has to do with the majority of the opinions out there at the moment that imply silver is “coiling” or “basing” for a significant pop upward. As it stands now, Silver is in its 21’st day of price consolidation after being sold off from $32.50.
Months ago I pointed out that the breakdown in the gold and silver minders index was foretelling further selloffs in the silver market. Silver and to a lesser extent gold, took a while to follow suit but they eventually did and today we sit with silver prices in an extremely tight range and more importantly, below $30.00 an ounce. ($28.80 to be exact as I write this).
Most of the logic behind the thinking that silver is going to explode higher soon is based on a few prevalent themes. The first one is the extremely bearish sentiment numbers. As a contrarian, people like to go long when bearish consensus is at extremes and conversely, when bullish consensus is at extremes, people like to go short. If you’ve been following the stock market you know that these consensus figures don’t always pan out. As an example extreme bullish consensus (optimism) has been in the equity markets for quite some time now and those markets just keep ploughing higher. Another reason I’m hearing has to do with what others are referring to “basing” or forming a launching pad of strong support following which the metal will explode upwards after this lengthy consolidation ends. I won’t get into some of the other reasons because to date, they have all been proven wrong (Quantitative easing programs to name the largest “supposed” catalyst – that one hasn’t worked out too well has it?)
So as investors what do we do? Continue to buy into the blind regurgitated nonsense about infinite easing that will propel silver and gold higher? Do we buy into the fact that FIAT will die one day and only those holding silver will survive? Do we buy into the theory that we are basing for a significant move higher? That’s up to you to decide based on your beliefs about the system.
However, I like to look for clues that could suggest direction. Just like the gold and silver miners index foretold a breakdown in the price of gold and silver, there are other clues we can look to when analyzing or trying to predict which direction silver will ultimately resolve in. This post will examine these clues.
I don’t want to get too long winded in my post but I feel that it is necessary to remind people that the markets often have a way of hurting the most people at the same time. That is, when everyone thinks the market will go one way, often it does the exact opposite and do a lot of damage to a lot of people. With that said, it is important to note the events of this past week alone surrounding Cyprus. As the gold and silver bull camp has often preached, banking holidays will signal the explosion in gold and silver prices. It appeared as though gold and silver were ready to break out on Sunday night in the overnight Asian futures market but those gains were quickly erased. Both metals rallied on Monday but except for gold, silver has lost that momentum. So, if bearish sentiment was at extremes, (and one can deduce from this that there must have been a lot of “shorts” in play) we should have seen a massive short covering that could have propelled silver much higher. However, the move was quite minor.
What might really be happening here is that silver and gold are both bleeding a slow death as their respective bull markets come to an end. I continue to point to that May 2011 blow off top in Silver when the chart went parabolic as I do the October 2011 double top in gold. Both metals have never come close to trying to re-test those highs but instead both metals are firmly caught up in a very noticeable and lengthy downtrend. Forget demand. I can confirm from someone more knowledgeable than me that the Perth Mint’s retail market for silver, both domestically and internationally are “dead”. Kitco metals is offering sales on silver bullion as are other online bullion retailers. This is not what one expects in a bull market or a market ready to explode.
With all that said, I don’t want to drift too far off topic so I will put aside my own thinking for a moment and look to the clues that I touched on earlier in this article. The silver bull camp has often argued that silver’s industrial use far outweighs its supply. Logically speaking, silver, being primarily an industrial metal, is expected to perform well in times of global expansion. Much like copper, one expects that in a time of global expansion and recovery, the metal should perform relatively well as the demand for the metal picks up. The same can be said for platinum. So, on that note, I was struck by what happened this week in both the copper and platinum markets. To wit, is what happened this week in platinum and copper foretelling the direction that the silver trade is going to finally resolve? A look at the charts is in order.
First, let’s take a look at the 1 year chart for copper. Note it’s consolidation phase labelled by the blue wedge. That consolidation phase is roughly the same time period that silver has seen in its own current consolidation. The breakdown is significant as it plummeted through key areas of support.
Then, let’s zoom in and take a look at a more recent 3 month snapshot of copper;
The consolidation phase is seen more accurately in this zoomed in shot. The 3 “black crow” candles that usually warn of danger ahead did just that. The consolidation in Copper lasted from the 25th of February to the 19th of March before it finally broke down, a period of 22 days. There may be more to meets the eye with copper though than just technical patterns.
According to TD securities, there may be more to this copper price collapse than meets the eye. As noted in the linked article, despite the fact that equities are nearing or at all-time highs there appears to be a disconnect between the falling price of copper and rising equities.
TD Securities note some factors working against copper. First, according to TD;
“the equity rally has been more about lower systemic risks in Europe and Federal Reserve liquidity injections, rather than the idea the economy is improving. Second, a rising U.S. dollar is also weighing on copper. Lastly, and most importantly, they say, is that China's growth might not be as strong as expected. "This implies that inventories will remain elevated for a while and that we are unlikely to see strong imports into China in the near term. In addition, manufacturing activity outside of the U.S. is on a bit of a slide—which usually spells bad news for copper. So the metal may be responding to the real economy and supply/demand fundamentals rather than the liquidity-driven euphoria that U.S. stocks have been rallying on,"
Secondly, let’s take a look at another industrial metal, Platinum. Again, we’ll take a look at its one year chart where many bearish patterns/warnings were visible to those paying attention.
Again, you will note the blue wedge at the far right that represents Platinum’s consolidation period. Platinum is now again at a discount to gold after getting clobbered yesterday. It made up some ground today but the intermediate term remains unclear after it’s expected bounce. Clearly a bearish head and shoulders topping pattern has emerged. Platinum bounced off the neckline but I expect it to pierce the neckline in short order leading to further declines. On the longer term horizon there is a distinct double top with the secondary top also forming the head of the aforementioned bearish head and shoulders topping pattern. Platinum recovered slightly today but was unable to penetrate the 200 day moving average that it breached yesterday. Let’s zoon in and take a look at the 3 month chart for Platinum;
Note the consolidation period in platinum took roughly the same time as copper, 22 days before its downtrend resumed in earnest. Again, the real reason for the breakdown is not known but if we apply the same logic that was applied to copper’s price action, if there is worry about industrial slowdown in places like China for example, the the industrial metal's price may be tied into the real economy and associated fundamentals as opposed to the liquidity fuelled rallies of the stock market which pain the illusion of a recovering economy.
This brings us to silver. We all know that it has been in a significant downtrend since May of 2011 when it had a parabolic blow off top and has been in a bearish downtrend since. Let’s zoom into the 3 month period as by now, you all know about silver’s slide.
As you will note on the chart, silver suffered a bearish death cross on March 1st when the 50 day moving average crossed and fell through the 200 day moving average. In addition, silver has now been in an extremely long consolidation period as well. The chart above was prepared last night but today marked the 21st day if silver’s consolidation phase. Like copper and platinum we see that we are approaching the apex of the wedge formed during this consolidation phase and silver is about to reach its do or die time.
As you all know from my past writings on silver, I have maintained for quite a while that I felt silver wouldn’t really complete its correction from the artificial May 2011 highs until we saw sub $22.00 per ounce prices and my opinion on that hasn’t changed. I maintain $20.00 –$ 22.00 is in the cards and perhaps even as low as $18.00. As I pointed out in a prior post, silver was starting to take on a shape of a significant head and shoulders pattern that could signal much lower prices ahead. I posted charts in my re-cap of this event on February 28th, 2013 when the death cross was close to confirming. Here’s the chart I posted on that day:
With the FED statement today not being quite as bullish for gold and silver as prior ones have been, it would not surprise me to see silver and perhaps to a lesser extent, gold, follow the path of copper and platinum. It is important to keep in mind that silver, copper and platinum have industrial uses that make them more vulnerable than gold to economic signals. If we are to use platinum and copper as our indicators for what may lie ahead for silver then instead of seeing that sharp rally that many people are calling for, we may actually see a significant decline. If we use the consolidation periods noted above for copper and platinum and apply them to silver then we may be closer than you think of finally resolving which way the white metal is going to go.
I prefer to wait for confirmation. According to my own numbers, a close above $29.80 could set off an explosive rally to the upside. However, a close below the recent low of 27.92 could set off significant selling that would surely test the neckline or at the very least the $26.11 area of SIGNIFICANT AND VITALLY IMPORTANT support.
At some point even the most astute silver bug will have to come to the conclusion that silver is primarily a monetary metal or an industrial one. You can’t have your cake and eat it too. If we are of the view that silver’s primary use is industrial and not monetary as is my position, then we may have just gotten our clues on the future price direction from platinum and copper. If you are of the view that silver is primarily a monetary metal then you have to really review that position and ask yourself why despite trillions of dollars in quantitative easing measures globally, the price of silver has shaved over 40% from it’s high of 2 years ago and why all recent gains attributed to easing measures have essentially been priced out out of the metal.
Like I said and it is important to highlight, silver along with copper and platinum are primarily industrial metals that make them more vulnerable to economic signals than gold. The reality is, before the financial crisis hit in 2007, people ran to gold, not silver in times of trouble. Whether by accident or design, the world flocked to silver after the financial crisis of 2007 while completely ignoring the fact that historically it has not been a flight to safety metal but instead an industrial one. The reality is that retail demand for silver is dead. people aren’t lining up at bullion shops anymore and the line-ups at bullion desks are gone. You cannot dispute that fact. It’s time for silver to return to being a metal whose price is determined by industrial usage.
This piece would be incomplete if I failed to comment on today’s FOMC statement. The committee left monetary policy unchanged in a move that was unexpected. The vote to hold the party line was 11-1 in favor of the current accommodative policy. However when reading between the lines, it does appear as though the FOMC is starting to throw out hints that it will not accommodate indefinitely. What could ultimately turn out to be bearish for gold and other commodities that include industrial metals was that the committee said that it is very aware of the costs of it’s easy money policy. What I got from this is that it is beginning to plan for an exit strategy, especially in light of the improving economic conditions in the United States. Although Federal Reserve Chairman Ben Bernanke said nothing market moving, investors should be worried that the recent good economic news may signal that the FED sill start to slow down the presses which would be bearish for gold and raw commodities. When we take these thoughts in conjunction with the statements I made above regarding the industrial uses for platinum, copper and silver and the fact that two of the 3 have resolved their consolidation phase to the downside, people wanting to invest in silver may want to wait until we get resolution at the aforementioned levels first. Now is a time to be neutral but I feel as though the answer to which way silver is going to go will be known soon enough.
Keep your heads up because the price of silver is on the verge of resolving very soon. I’ve provided you with the information that hopefully you can use when making your decisions. This is not a recommendation to buy or sell. I’ve painted the levels to watch as clearly as I can and I will take action accordingly when those levels are met. My point is that if you are a silver investor or trader, these next few days may turn out to be the most important trading set up days we’ve seen in silver for over 3 weeks. Would I be a buyer of silver should the metal come down to $18.00 to $20.00 levels? I will reserve commentary on that until I have the opportunity to reassess the situation should this event happen.
Therefore, like many silver articles that have popped up on the internet over the last week or two regarding silver’s basing or “coiling” be aware that the explosion in price can happen either way. Also, if we were truly in a situation where the shorts were going to be severely squeezed, Sunday night, Monday, after trading opened following the events in Cyprus would have been as good a time as any to see such a massive squeeze.