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Does Silver’s ‘Smooth Ride’ Lead Past $30?

Articles & Blogs - Silver Commentary

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Regular readers will know that I shun short-term charts and “technical analysis”. Such tools carry a low degree of reliability,since they are built upon numerous false assumptions (beginning with “free and open markets”, and “perfect information”). I submit to readers that markets have never been less “free and open”, and information has never been so far from “perfect”.

 

Worse still, almost none of the people who engage in such analysis have any theoretical training in statistics. Lacking such education, they are simply oblivious to how much accuracy is lost with such tools – when we shorten the time-horizon.

Long-term charts, on the other hand are an entirely different matter. The much, much higher level of reliability which is provided by a longer time-horizon is a powerful compensating force versus the margin of error caused from using flawed assumptions. Relying upon superior tools inevitably means greater clarity when analyzing any particular market.

In the case of silver, when we begin looking at longer-term charts, there are a few obvious facts which leap out at viewers, and some which are perhaps not so obvious. To begin with, unlike almost any other market, silver never goes sideways. It is either moving strongly upward, or strongly downward – reflecting the “struggle” between market-rigging bankers looking to keep silver grossly under-valued, and the even more powerful force of supply-and-demand.



While such fundamentals can be temporarily negated through artificial intervention in markets, over any longer time horizon such manipulation must fail as a simple matter of arithmetic. Price any good too high, and eventually demand will collapse to a level which forces the price down toward its natural equilibrium. Under-price any good, and demand will relentlessly devour supplyuntil the imbalance crushes anything and everything seeking to suppress that price.

Sadly, few bankers have any understanding of statistics, and only a glimmer of understanding when it comes to supply and demand. They chuckle to themselves when their own relentless, brute-force manipulations give them short-term victories in driving the price of silver (and gold) to some ridiculous level – totally failing to understand that the more they succeed over the short-term in these minor “battles” the sooner and more-total will be their defeat in the “war”, since they are fueling demand while simultaneously obliterating supply.

Getting back to the charts, we see that this endless power-struggle has resulted in perhaps the most-jagged chart one will ever see with respect to a major commodity. However, if we look a little closer, we see that occasionally this very jagged line smooths-out – and when it does, it means that silver is heading straight up or straight down.



 

By itself, this observation is not tremendously helpful, as we only know that silver has made a “smooth move” after some leap higher or lower, with no guidance as to whether any particular strong move will continue. What is more helpful is to note the striking similarity between two, major trends – which are visible when looking at the eight-year chart for silver.



 

Silver hit a short-term “top” in May 2006, at approximately $15/oz. It then proceeded to pull back all the way to about $10/oz – a 33% retreat. From that bottom in July of 2006, it then proceeded to enter a very choppy period of consolidation between then and January 2008 before making a near-vertical – and smooth – ascent to $21/oz in March 2008. The total gain from the July/06 trough to the medium-term peak in March/08 was roughly 110%. The last, vertical move from January/08 (at roughly $14/oz to $21/oz) was a 50% move.

From that peak in March of 2008, silver plunged to an even more-dramatic bottom of $9/oz, in October of 2008. This collapse of nearly 60% was roughly twice as large in size, and nearly four times as long in duration, compared to the plunge in May 2006. Again looking at the eight-year chart, we see the build-up to the dramatic spike in silver in January of 2008 (and the smooth-ride to $21) looks very similar to the current period starting in October 2008 to the present – except this formation is obviously much bigger.

If we assume that this long-term pattern is about to repeat, we are presented with two price-targets in silver. If we compare the peak-to-bottom move from May/06 to July/06 to the move from March/08 to October/08 (and note that the move was nearly twice as large), this implies a subsequent ascent of almost twice the distance of that 110% move. This would lead us from $9/oz to about $27/oz.

The second period of comparison is to look at the “smooth ride” silver had from January to March of 2008, where it advanced roughly 50% - and which looks very similar to the current advance. If we project this spike to be nearly twice as large as the spike at the beginning of 2008, it takes us from just under $18/oz to close to $35/oz. If we average these two comparisons, this puts us at about $31/oz.

I once again caution readers that given the inherent flaws in “technical analysis” and the “imperfections” of our current markets that we should never blindly (and boldly) plunk-down our money solely on the basis of “what the charts say”. However, for those investors who have already decided that they want to begin or add to a position in silver, what the charts suggest is that silver’s current bull-rush is a long ways from being over.

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Comments (13)Add Comment
Jeff Nielson
...
written by Jeff Nielson, September 27, 2010
Till1000, thanks for the reply.

With respect to the taxing of LEGAL TENDER minted, silver coins, I have to wonder if taxing such items is in fact 'illegal' - or at least a blatant contradiction of other tax policies?

If you SWAP paper currency for silver "currency" (i.e. legal tender minted coins), and you do so for purposes of SPENDING that money (like when one goes on vacation to a foreign country), then there should be NO TAXES PAYABLE.

If you swap Euros for British Pounds, to go on a holiday in the UK, do you pay VAT on such currency transactions?

By the way, if you haven't read my previous piece on bullion and taxation, I use the SAME argument to claim that we should not owe any "capital gains taxes" on our bullion IF we are acquiring it to "spend it".

Till1000
...
written by Till, September 27, 2010
@Jeff - hi again!
The thing you have to consider is the VAT for silver in Europe.
Here in Germany it's 7% for legal tender and 19% for bars...
The nice Kookas and Koalas are less expensive than 1 kg bars in Germany!
That's the reason why bars are not been sold in high quantities in silver.
The vat stuff is also provoking funny things: there's a clever german dealer who bought a licence from the Cook Islands and now is producing "coins" up to 5kg in form of bars..;-) look here: http://www.anlagemetalle.de/pr...2008-.html
But this is not the main deal in silver..I would estimate that 90% of the consumer demand is buying from the big mints (Austria,Australia, Kanada and USA)
We haven't many "own" coins here in Europe..the most famous is the Philharmonic form the Autrian Mint. But there is no proper coin in Germany...

But even is the germans are buying bigger countities of silver and gold the last years it's nothing compared to their savings...especilly silver is still an insider-story...I started buying in 2008 and I am still "alone" with my investment. The people have been laughing at me..but at the end I might be laughing at them...;-)
There are around 5 trillion (yes..no typing-error) euros hanging around in bank acounts with low interests...the germans are really a "saving" nation..if they only would move a few percents into the precious metals markets it would be empty in a few days..in may this occured already.

Greets
Till1000
lyleric
...
written by Lyle, September 26, 2010
Thanks for the interesting information and discussion guys! On silver, I recently heard Bob Chapman reference a private, or maybe class action lawsuit against JP Morgan. I got the perception that GATA was the likely party. Does anyone know anything about this? I'm cetain the the CFTC will do nothing about the criminality, as they are an accomplice. Lyleric
Jeff Nielson
...
written by Jeff Nielson, September 26, 2010
Till1000,

Thanks for your own observations. It's especially nice to get some news/perspective from across the Atlantic.

I'm interested in your comment about coin-buying in Germany. Are there no European "mints" producing their OWN, legal-tender coins for their own domestic consumers?

I assume that at least the Swiss must be involved in such minting. Given how Europe has been driving the gold market over the last several months with heavy buying, are there any demands from the people for their OWN coins to buy?

As for the current silver-rally, yes, I certainly believe that "investment" or "monetary" demand is the primary force behind the recent surge.

The industrial market SUPPORTS prices more than driving them. Indeed, as I pointed out previously, industrial usage actually tends to DEPRESS the price of silver, since it is what forms the basis for all LEGITIMATE hedging in the sector.

Certainly if (when?) our current monetary system breaks down, over the short term silver MUST become "money" (again). Gold (ironically) is simply too valuable to be used in the day-to-day commerce (i.e. small purchases) which forms the majority of all economic activity.
Till1000
...
written by Till, September 26, 2010
Again an interesting comment Jeff!
Even if I am not a big fan of analysing charts in the manipulated pm-sector..
A little bit of "off-topic-observations":

1) I'm actually really impressed by the the strengh of the silver price in the last weeks. The drops are really short and are recovered in a few minutes/hours..and the closing on friday was super strong. New highs at the end of the session and without gold beeing strong..impressive!

2) In my point of view the silver-bugs ( me too) are focussing too much on the role of silver as commodity and industrial metal. I'm trying to see silver more as money with additional applications that are important.
I've been reading an article that silver has a longer history as money than gold!

3) Here in Germany the press is starting to discover silver..there have been several articles about silver after the strong move in the last weeks..
But it's still funny to read comments about the "high" prices of the precious metals..99% of the articles don't mention the "small" factor of inflation if they are speking about a new 30-year-high...There's still a small move to 125 $ necessary to meet the inflation adjusted ath 30 years ago! Even if we erase the "Hunts-Brothers-factor" leading to the high prices we are far away of understandable prices of silver.


4) Another observation for Germany: the low sales volumen for Eagles this month could be caused by the higher premiums you gotta pay here in comparison to Maples and Philharmonics. The german consumer is really price-sensitive and if the Eagles are 2-4% more expensive then the other coins he is not buying them in large quantities. I don't know the numbers of Eagles sold in Germany but this might be an explanation..

Greets and nice sunday!
Jeff Nielson
...
written by Jeff Nielson, September 25, 2010
SailorTony, thanks for the input.

I don't know if what I did even qualifies as "technical analysis". I merely pointed out the similarity in two "pictures" (lol).

It IS always reassuring when some other reputable commentator reaches the same conclusion - AND through a different method. I guess James Turk gets more "credit" for getting HIS call out a lot sooner!
Jeff Nielson
...
written by Jeff Nielson, September 25, 2010
Breezer, since I'm hoping/expecting that this is going to be a short-term price target, I would HOPE that the "premium" at that price-level would decrease - since that sort of a run should cool-off demand at least a little (for a little while).

I'm NOT expecting a massive collapse, like after the two previous "tops", but more of a moderate correction...
sailortony
...
written by Claude, September 25, 2010
Good technical analysis,Jeff, but quite different from all those I have seen so far.
The one I liked the most (before seeing yours!) is the Head & Shoulder Pattern analysis of the same period by James Turk:

http://www.fgmr.com/images/Images Commentaries/Silver NY 1 April 2010.GIF

He wrote back in April:

"Silver has formed a huge accumulation pattern. One could even make the case that it is a reverse ‘head & shoulders’ pattern, with two shoulders that are shallow compared to its deep head. The right shoulder is now being completed, and the pattern will manifest its bullish significance when silver climbs above the neckline around $20.

Looking at it from a pure technical point of view, this pattern can forecast silver’s price target. The difference from the neckline to the bottom of the head is about $13.50. When this difference is added to the neckline, the near-term objective on the breakout is $33.50. In other words, the upside breakout from this pattern could be breathtaking."

In other words he came to a conclusion similar to yours.

Needless to say, I hope you are both right!

Take care




breezer1
...
written by breezer1, September 25, 2010
another well researched piece jeff. what will the premium be at $30 ?
Jeff Nielson
...
written by Jeff Nielson, September 24, 2010
I understand the healthy skepticism with my chart-forecast. The funny thing about longer-term charts is that the fundamentals seem to conveniently line-up to follow the long-term pattern.

Obviously nothing is guaranteed, but with both India and China buying heavily (among others) a short-term target of $30 certainly isn't out of reach. I should have provided a bit more detail regarding time: if we assume that this formation remains about twice the size of the previous formation, that implies $30 by around Christmas.

Thanks for the support, everyone.
Brian Boutilier
...
written by Brian Boutilier, September 24, 2010
I too enjoyed the article. It is good to look for a short term goal like 30 dollars, before I can wrap my head around all the 100 to 200 dollar beating of the drum articles circulating lately. I too understand that fundamental have had nothing to do with the price of silver over the last 50 years as you and many other authors have been bringing to the publics attention. Will the pressure by the CTFC to limit short positions on many commodities finally wrap up this overt manipulation? Will the Silver lobby by the many unsung heros finally be heard?
Or will the pendulum swing the other way, just to have a new majority in Congress allowing a new wave of lobby by big bank interests? Will they succeed in convincing everyone in a strong dollar, and good Ol fundamental therefore crushing commodities for another term. Will they repeal laws just put in place to curtail this graft.
Ah, yes I know our problems have 3 more zeros than our solutions. But right now, the media is controlling the mob, and the banks own the media. Perhaps we need a colosseum, to sort out some of our corruption issues.

Alas, I'm drifting. If the market is left to itself, with right sized limits for commodities, then fundamentals will start to take effect, and we will have to get to 30 dollar silver before moving to bigger and higher ground.
Right now 30 dollars would be a 30-50% rise is margin for these struggling, undervalued silver producers. I will have to turn off my computer and ignore the television, and just let everything go long. The temptation to take profit too soon will be high. I have to remind myself that I want is these companies, not cash.
I'm not an economist, although I do understand enough theory to know that silver isn't following any such thing.
Keeping an eye on big bank interests and how it sways Congress and the President going forward, that will determine whether or not this metal will have its day, and we will have ours.
apberusdisvet
...
written by Andy Bergeron, September 24, 2010
Jeff: good comments as usual. My perspective, however, is to dismiss the charts, predicated as they are on values established through manipulation and fraud. It's interesting that in the latest run-up, the JPM shorts are nowhere to be seen; are they hiding under a rock licking their wounds? Or are they preparing for one final assault? My guess is that they have decided to leave the game due to the unmistakable market forces driving the price over which they have absolutely no control. Regardless, I'm a holder, not a reactor to any dips. BTW, your article on the medical uses of silver was given a big thumb's up by one of my nephews who is a molecular biologist.
SilverGoldBull.com
...
written by Mihali, Nick, Christopher, Bob , September 24, 2010
Amazing article Jeff! I can tell you what we are hearing on the "street". Our suppliers are blowing through material at record pace, and see no let down. One shipper actually commented that they are on 12 hours shifts for the first time in his 18 years with this company. I know the paper market dictates the price but the physical market is speaking volumes and my feeling is if they can't knock down the price today or Monday (options expiry), we will likely be off to the races!!!

Have a great weekend!

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