March 18, 2020, 9:18 AM
In yesterday's free analysis, we explained why a short-term corrective upswing in the S&P 500 was likely just around the corner. In today's article, we'll discuss how it's likely to impact our silver price forecast. We'll also make comment on the current opportunity in silver compared to the opportunity in the mining stocks.
Let's start with a few questions that we received recently and let's reply publicly for the benefit of all.
From the Readers' Mailbag
Q: There have been statements circulating, mostly from those promoting physical precious metals, such as KITCO, etc., a lot more in the last days and weeks than usually, that the physical silver prices are at a great premium to the paper (futures) prices, such as $1.50- 2.00 above spot prices. They are claiming there is a serious present shortage. However, my investment advisor tells me that there is, in fact, currently a significant glut of physical silver.
A: That's more or less... Normal. The prices on the futures market change fast, and the physical side takes some time to adjust. Sellers view the moves in futures as very brief, and hoping that prices will move back up, they don't want to sell their inventory at what they view as prices that are ridiculous and temporary. But as the time passes, the prices on the physical market adjust. The same thing happened in 2013 when silver was declining substantially. The physical market lagged, and people were claiming that the physical market remains strong and that it's all temporary, manipulative etc. Silver didn't shoot back up then because of these claims, and it's unlikely to soar back up for this reason right now.
The emphasis goes on "for this reason", as we expect silver to move higher in the very short term, and verify the breakdown by moving back up to the 2015 lows, before sliding further. The reasons are emotional (technical) - no market moves in the same direction indefinitely.
Q: Please comment on the quote below:
But it's the supply side that has changed the market. No matter what the idiot permabull silverbugs may claim, there is an glut of silver and the physical oversupply is from the big base metals miners, e.g those with massive skarn or porphyry copper deposits in the Andes who suddenly started paying attention to their rather minor by-product credit a few years ago when the streamer companies offered serious money for something they'd taken for granted until then. "
A: First of all, we want to say that we think that silver will soar exceptionally in the following years. Not before sliding even more before, though. I - PR - like to think of myself as silver's fan, but not a fanatic. I was one of the very few people that refused to view the gold to silver ratio at about 80 as something bullish.
The supply of silver is indeed relatively inelastic as it is mostly mined as a by-product. This is one of the reasons that makes silver so volatile. If it declines, the supply cannot be quickly limited to balance the price. If it soars, the supply cannot be quickly increased to balance the price. It's a double-edged sword that currently makes the declines so significant, but also one that is likely to make silver soar particularly sharply in the final part of the next long-term upleg.
Q: I have been told that extreme lows in the Silver:Gold ratio (as is currently) has in the past led to significant rallies.
A: In other words, extreme highs in the gold to silver ratio (as is currently) has in the past led to significant rallies (in gold and silver).
And that's true. The gold to silver ratio has been in a long-term horizontal trend for decades moving between 100 and 15. When a given resistance level in a trend (horizontal trend is still a trend) is being reached, it's likely that the price or ratio (whatever was in the trend) is going to reverse.
But it all changes dramatically once we see a breakout above the resistance level. That's why breakouts (and their confirmations) are so important as a trading tool.
In case of the gold to silver ratio, we saw an extreme breakout. It normally takes at least several daily closes before a given breakout is confirmed. This kind of confirmation arrived but was not necessary because the breakout was so huge. It was definitely not accidental.
The breakout is a game-changer. It means that we are in uncharted waters and that it's a tough call to say how high can the gold to silver ratio really rally, since it was just strong enough to pierce through a multi-decade resistance like a hot knife through butter.
The Fibonacci extension tool can be useful here. The point is to "extend" the previous major move in a given direction by a factor of 1.618, 2, or 2.618. The last two are most interesting as the extension based on 1.618, was already reached and broken.
Based on these extensions, we get targets of 134 and about 170 (barely visible on the above chart). If gold declines to $890 after all, then the gold to silver ratio at about 170 would correspond to about $5 - close to its all-time lows.
Crazy? Wasn't it just as crazy to expect silver below $12 just a month ago?
Let's take a closer look at silver's very long-term chart.
Silver in the Spotlight
The analogy to 2008 that we outlined on Monday (and that we've been featuring for many months) clearly remains in place.
And so does the similarity to the 2012 - 2013 slide. The former is marked with yellow, and the latter is marked with blue.
Based on both analogies, it's about time (and price) for silver to correct... Before declining even more.
The analogy to 2008 has been working remarkably well in terms of prices. That's what the yellow lines represent. The most recent slide in silver is almost perfectly in tune with the initial sharp slide that we saw in 2008. Once you click on the chart to zoom in, you'll see a thin black line that shows the size of the slide in 2008, and you'll see that we copied it on the left side of the current decline. They are so similar that it's shocking even for us - and we've been writing about this extreme similarity for many months.
How did silver perform then in 2008?
It corrected to the nearest strong horizontal resistance level and the relatively round number of $14. It was about midway between the bottom and the 38.2% Fibonacci retracement. There was a second bottom after the initial one, two days later.
How about the current situation?
Silver moved lower today, and while it didn't move between yesterday's and Monday's intraday low, it's already very close. It will take silver only about 35 cents more to decline below yesterday's low and to make this rebound extremely similar to what happened in 2008. Then again, that's just a cherry on the analytical cake, and the analogy to 2008 will remain intact even if the shape of today's session is a bit different.
Silver is now a bit lower than it was in 2008 in nominal terms, so the midpoint between the recent low and the 38.2% Fibonacci retracement is below the $14 level. Is there any significant horizontal resistance located over there? Of course, there is!
It's the 2015 bottom - it formed at $13.62. This target is aligned with the mid-point between the recent low and the 38.2% Fibonacci retracement.
And the analogy to 2012-2013? Please note at what pace silver declined from the very first top (blue line). During the first very volatile slide, it corrected only after it reached the declining blue line. Guess what? Copying the same line to the recent final top (the 2019 one) provides us with a line that was just reached recently. This suggests that silver is about to rebound before moving again.
How high did silver rally during the analogous correction in 2013? It moved up by about 12.7%. Applying this kind of rally to the recent low in silver provides us with $11.77 * 1.127 = $13.26 as the target for the next local bottom. Of course, this analogy is not as precise as the 2008 one, so it can be used as its confirmation - this target is very close to the 2015 low.
One more note regarding the 2013 corrective upswing. Please note that two days after the initial bottom, silver formed another local low and then rallied in the following days. That's exactly the same way silver bottomed (temporarily) in 2008.
Today is the day that's two days after the initial bottom, so if silver moves temporarily lower today, please keep in mind that it's normal, and it doesn't invalidate the scenario in which silver now corrects higher.
This could be what's likely ahead for the stock market and other commodities as well. The S&P 500 futures are lower so far today, but this might be the final move lower before their corrective rally. Crude oil moved lower as well and it might be bottoming shortly (we just cashed in profits on our short position in crude oil about an hour ago). In tune with the above, mining stocks could decline early today, only to move back up later and/or in the following days - we are not exiting our long positions in the miners at this time.
In fact, the best risk to reward opportunity continues to be in the mining stocks in our view, even though silver is about to correct upwards.
It is often the case that silver outperforms mining stocks in the final part of a given rally, but after examining how corrective upswings were shaped in different parts of the PM market during the 2008, 2011, and 2013 declines, it seems that this rule doesn't really apply in case of quick rebounds within bigger declines.
If we see signs that miners are underperforming gold and that silver would still have some sizable upside potential, we might switch our long positions from miners to silver. It's too early to say if we're going to do it or not.
Also, we would like to take this opportunity to explain why we are aiming to profit on miners' rebound only. It's not because we're not forecasting gold or silver at (temporarily) higher prices. The corrective upswing is likely to take place, and it seems that it's already in progress. The point is that miners are usually the first to rally after a bottom, and they became ridiculously oversold in the short run recently, which made their run-up most likely and created the most favorable risk to reward setup. That's why our focus is over here right now. There will be many times, when diversification between gold, silver, and miners is the way to go, but right now, concentrating on the miners seems to be a better choice. This choice proved to be very lucrative over the last few days (especially that we entered the long positions in the miners in the final 25 minutes of Friday's session, almost right at the intraday low).
Thank you for reading today's free analysis. Its full version includes detailed upside targets for our long positions in mining stocks that we entered in the last 25 minutes of Friday's session (based on yesterday's closing prices the UNLEVERAGED positions in GDX and GDXJ are about 50% profitable). We currently offer 10% discount for the first subscription period (even for the yearly subscriptions). Given how volatile the markets are, how profitable our trades just were and currently are, and how much is likely around the corner, the time to subscribe was never better - subscribe at a discount today.
March 17, 2020, 11:26 AM
March 17, 2020, 10:49 AM
March 17, 2020, 8:45 AM
Practically everything that we wrote yesterday about the big picture remains up-to-date, so today's analysis will be dedicated to the two mining stock ETFs that we are currently focusing on in case of our long trade: GDX and GDXJ. We will show you what determines the current target area, and we will explain why we are moving our profit-take levels higher.
But first, a quick update regarding the outlook for gold. Yesterday's session strongly indicated that the yellow metal can - and is likely to - decline during this crisis. Gold is an excellent hedge against major wars, financial crises, and hyperinflation. During war times, currencies might not be as good as a precious metal that used to be money for thousands of years. During financial crises and hyperinflation, gold helps to preserve one's purchasing power when things go south.
What's happening right now is none of the above cases. This is a major global pandemic, and gold's ultimate-store-of-wealth status won't help much. It's not a war - we don't have the need to use gold as money. It's not a financial crisis - there might be local liquidity shortages, but the Fed and other banks are standing ready to provide the liquidity as the need arises. It's not hyperinflation either.
And you know what gold needs to fulfill its role as money? Human contact. You need to handle it over to someone (or receive it) to facilitate the trade. Right now, it's the last thing that is advised. Instead, electronic payments and credit cards (especially touchless technology) are much preferred.
It's not a situation in which gold shines.
Of course, just like in 2008, gold is likely to regain value quicker than stocks as people want to have some hedge against the worst anyway, but gold likely won't be immune to further major slides.
Still, silver and miners are likely to drop harder as they are also likely to decline based on the slide in the stock market.
And speaking of the stock market, while the specific trades in the S&P 500 are governed by our Stock Trading Alerts, and stock selection market-neutral strategy (which greatly outperforms S&P 500 right now...) is taken care of by our Stock Pick Updates (this might be a good time to consider these services), we will still cover the general stock market here, to the extent that it's useful for explaining the moves in the precious metals.
In this case, we would like to draw your attention to the specific pattern in the daily candlesticks.
The Clues from the Stock Market
The S&P 500 futures are posting lower intraday lows, but the pace at which it declines overall, has slowed down compared to previous days.
Given all the similarities (as discussed yesterday) to 2008, did we see something similar back then, and if so, what happened next?
We did. Just before the sizable corrective upswing. This indicates that the stock market is likely to correct upwards anytime soon.
There are also three big non-market factors that make it even more likely.
First, the Fed's interest rate decision is tomorrow, and it could be the case that the Fed pumps even more liquidity into the system.
Second, which is related to the first point, is that just after the Fed's major surprising move, the market declined anyway... Which makes the Fed look... Well, stupid. The officials don't like to look stupid, and Fed's credibility is of utmost importance, especially now when they have used most of their bullets. This means that the Powers That Be will likely use whatever trick they could to make the stock market rally. Perhaps by asking their investment banker friends to start buying stocks (or maybe they will be rather "persuading" them than "asking"). Or perhaps short-selling will be banned... Which brings us to the third point.
Third, the short-selling is already being banned in Europe. Quoting from Reuters:
France, Italy and Spain are introducing curbs on stock market trading on Tuesday, banning short-selling to shield some of Europe's biggest companies from a sell-off triggered by the coronavirus.
France is banning short-selling on 92 stocks, the financial markets authority said as it tries to calm market turmoil. Belgium also took a similar step.
The Powers That Be desperately want to stop the declines and... We think they will succeed. But only for a while. This "while" will be enough for the market to take a breather and get ready for another powerful leg down.
This creates a very bullish situation for the mining stocks (in the very short term), which were recently led lower by the stock market. Silver might be affected as well. Given how silver corrected in 2008 after a similar slide, it would now be likely to correct to about $14, which more or less means a verification of the breakdown below the 2015 lows by moving back to them. Some may want to bet on silver's or gold's rebound, and it would probably be successful, but we will focus on mining stocks, which offer better risk to reward opportunity in our view. Plus, they already showed substantial strength by rallying yesterday, despite not having a good reason to do so (gold, silver, and stocks ended yesterday's session lower), despite being extremely oversold previously.
Thank you for reading today's free analysis. Its full version includes detailed (just updated) upside targets for our long positions in mining stocks that we entered in the last 25 minutes of Friday's session (based on yesterday's closing prices the UNLEVERAGED positions in GDX and GDXJ are about 30% profitable). We currently offer 10% discount for the first subscription period (even for the yearly subscriptions). Given how volatile the markets are, how profitable our trades just were and currently are, and how much is likely around the corner, the time to subscribe was never better - subscribe at a discount today.
March 16, 2020, 12:48 PM
Wow, what a move we just saw in silver... Without further ado, let's dive into the chart.
Silver just plunged to our initial target level and reversed shortly after doing so. It was for many months that we've been featuring the above silver chart along with the analogy to the 2008 slide. People were laughing at us when we told them that silver was likely to slide below $10.
Well, today's low of $11.80 proves that we were not out of our minds after all. Our initial target was reached, and as we had explained earlier today, the entire panic-driven plunge has only begun.
Those who were laughing the loudest will prefer not to notice that silver reversed its course at a very similar price level at which it had reversed initially in 2008. It was $12.40 back then, but silver started the decline from about 50 cent higher level, so these moves are very similar.
This means that the key analogy in silver (in addition to the situation being similar to mid-90s) remains intact.
It also means that silver is very likely to decline AT LEAST to $9. At this point we can't rule out a scenario in which silver drops even to its all-time lows around $4-$5.
Crazy, right? Well, silver was trading at about $19 less than a month ago. These are crazy times, and crazy prices might be quite realistic after all. The worst is yet to come.
Let's quote what the 2008-now analogy is all about in case of silver.
There is no meaningful link in case of time, or shape of the price moves, but if we consider the starting and ending points of the price moves that we saw in both cases, the link becomes obvious and very important. And as we explained in the opening part of today's analysis, price patterns tend to repeat themselves to a considerable extent. Sometimes directly, and sometimes proportionately.
The rallies that led to the 2008 and 2016 tops started at about $14 and we marked them both with orange ellipses. Then both rallies ended at about $21. Then they both declined to about $16. Then they both rallied by about $3. The 2008 top was a bit higher as it started from a bit higher level. And it was from these tops (the mid-2008 top and the early 2017 top) that silver started its final decline.
In 2008, silver kept on declining until it moved below $9. Right now, silver's medium-term downtrend is still underway. If it's not clear that silver remains in a downtrend, please note that the bottoms that are analogous to bottoms that gold recently reached, are the ones from late 2011 - at about $27. Silver topped close to $20.
The white metal hasn't completed the decline below $9 yet, and at the same time it didn't move above $19 - $21, which would invalidate the analogy. This means that the decline below $10, perhaps even below $9 is still underway.
Naturally, the implications for the following months are bearish.
Let's consider one more similarity in the case of silver. The 2012 and the 2018 - today performance are relatively similar, and we marked them with red rectangles. They both started with a clear reversal and a steady decline. Then silver bottomed in a multi-bottom fashion, and rallied. This time, silver moved above its initial high, but the size of the rally that took it to the local top (green line) was practically identical as the one that we saw in the second half of 2012.
The decline that silver started in late 2012 was the biggest decline in many years, but in its early part it was not clear that it's a decline at all. Similarly to what we see now, silver moved back and forth with lower highs and lower lows, but people were quite optimistic overall, especially that they had previously seen silver at much higher prices (at about $50 and at about $20, respectively).
Also, if you didn't profit on the recent decline in silver, don't despair - this decline seems to be far from over and there will be plenty of room for profits, especially that silver seems to be starting a corrective upswing now. Just like it did in the 2008. Back then, it corrected to about $14 before moving lower and this might be a realistic target also this time. This would serve as a verification of the breakdown below the 2015 low, and it would open the way for even lower silver prices.
Meanwhile, silver's relationship with gold continues to support medium-term downtrend in the precious metals sector.
Remember the time, when the gold to silver ratio moved to 80 and practically everyone (well, we didn't) told you to buy silver? We told you that the real long-term resistance was at the 100 level, and that the gold to silver ratio broke above the previous highs, it was likely to shoot up. That's exactly what happened.
Last week we wrote about the move to the 100 level in the following way:
We've been writing the above for weeks, despite numerous calls for a lower gold to silver ratio. And our target of 100 was just hit today. It was only hit on an intraday basis, not in terms of the daily closing prices, but it's still notable.
We had been expecting the gold to silver ratio to hit this extreme close or at the very bottom and the end of the medium-term decline in the precious metals sector - similarly to what happened in 2008. Obviously, that's not what happened.
Instead, the ratio moved to 100 in the situation where gold rallied, likely based on its safe-haven status, and silver plunged based on its industrial uses.
Despite numerous similarities to 2008, the ratio didn't rally as much as it did back then. If the decline in the PMs is just starting - and that does appear to be the case - then the very strong long-term resistance of 100 might not be able to trigger a rebound.
It might also be the case that for some time gold declines faster than silver, which would make the ratio move back down from the 100 level. The 100 level could then be re-tested at the final bottom.
Or... which seems more realistic, silver and mining stocks could slide to the level that we originally expected them to while gold ultimately bottoms higher than at $890. Perhaps even higher than $1,000. With gold at $1,100 or so, and silver at about $9, the gold to silver ratio would be a bit over 120.
If the rally in the gold to silver ratio is similar to the one that we saw in 2008, the 118 level or so could really be in the cards. This means that the combination of the above-mentioned price levels would not be out of the question.
At this time it's too early to say what combination of price levels will be seen at the final bottom, but we can say that the way gold reacted recently and how it relates to everything else in the world, makes gold likely to decline in the following months. Silver is likely to fall as well and its unlikely that a local top in the gold to silver ratio will prevent further declines.
Indeed, gold to silver ratio didn't stop the decline and it's unlikely to stop it anytime soon. The reason is that the ratio broke above the 100 level and today, it soared above it even more. At the moment of writing these words, the gold to silver ratio is trading at about 120.
Breakout above the resistance level as extremely important is very likely to be followed by at least a pullback. A comeback to this level (100) and then another move up seems to be the most likely outcome.
This means that silver would be likely to recover - and it would be likely to recover more than gold.
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