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Silver has certainly enjoyed an impressive run of late, catapulting
nearly a third higher since mid-summer. Because this surge looks nearly
vertical on short-term charts, some traders are getting nervous about this
rally’s staying power. While silver may indeed be temporarily
overbought, its recent strength actually looks like the vanguard of a major
new upleg. Silver’s advance is likely just
getting started.
Skepticism of silver’s potential continues to run rampant among
speculators and investors. But this is par for the course after a major
correction. Back in the spring of 2011, silver rocketed parabolic in a
gargantuan upleg. But it became wildly overbought,
hitting the most extreme
greed levels of its entire secular bull. So over the subsequent 14
months, silver corrected dramatically by a staggering 45.5%.
Remember that the job of any correction is to rebalance sentiment,
to eradicate the greed and euphoria that necessitated that correction in the
first place. So the bigger the upleg leading into a
major topping, the bigger the subsequent correction will have to be. Thus it
shouldn’t be the least-bit surprising that silver’s biggest upleg by far of its entire bull was followed by its biggest
and longest correction.
Silver finally bottomed in this past summer’s precious-metals doldrums, and as always after a
major correction sentiment was rotten. Fear and apathy reigned supreme in
late June and early July as silver languished near 19-month lows. This metal
was largely left for dead, with bearish commentary abounding. But out of just
such major sentiment ebbs is when major new bull-market uplegs
are stealthily born.
While powering nearly a third higher in the less than 3 months since then
may seem excessive, it is really nothing special for silver. This
hyper-volatile metal has always been a speculators’ playground. The
relatively small size of the silver market means it doesn’t take much
capital sloshing in or out to ignite big and fast moves. Considered within
the context of its own bull, silver’s latest advance is actually minor.
Perspective is everything in the markets, so we’ll start with a
long-term silver chart. Most sizable moves look excessive on short-term
charts, and silver’s latest is certainly no exception. But traders
worried that silver’s latest surge is too big and sharp to be
sustainable are trapped in the tyranny of the present. From a broader strategic
perspective, silver’s recent strength simply looks like a young new
major upleg.
Let’s start with silver itself, rendered in blue here and slaved to
the right axis. In the context of its broader secular bull, the recent 31.9%
rally in 2.7 months doesn’t even stand out. In the final month alone
leading into its last upleg’s top in April
2011, silver saw a similar gain in far less time. But that surge happened
from highs as greed waxed extreme, the polar-opposite sentiment environment
from last summer’s lows.
And out of major lows after major corrections, major new uplegs are born. Silver has enjoyed 5 of these since
2003, all marked above. Leading into early April 2004, silver climbed 71.5%
higher in 6.0 months in its first real upleg of
this bull. After that silver consolidated for the next year and a half or so
to eradicate the excessive greed seen at that first topping. And then
speculators finally returned and silver soared again.
Over 8.5 months climaxing in mid-May 2006, silver blasted 124.0% higher
in this bull’s second major upleg! Then once
again after being bathed in such greed and euphoria, silver corrected and
consolidated for well over a year. Finally in the summer of 2007 silver
sentiment was bad enough to spawn its third major upleg,
which crested at an 80.5% gain 6.5 months later in early March 2008.
As a hyper-speculative metal, silver was naturally ripped to shreds in
the subsequent once-in-a-century
stock panic. Between July and November 2008 at that panic’s
climax, silver plummeted a gut-wrenching 53.4%! Talk about a bloodbath. But
while most traders succumbed to that epic fear superstorm,
we stuck to our contrarian guns and bought into it. If you want to buy cheap,
there’s no better time than a panic.
Deep in its dark heart, we bought and recommended a long-term investment
in an elite silver stock to our subscribers. The brave contrarians who
followed us into the breach are now sitting on 1007% unrealized gains. The
only way to earn big money in the markets is to be brave when others are
afraid and afraid when others are brave. Buy low when no one else wants to,
and then sell high when everyone else wants to buy.
As I expected after
seeing such insane levels of fear, silver indeed recovered rapidly after the
panic. It powered 115.4% higher over the subsequent 12.4 months, nearly
regaining its pre-panic highs. Since that stock panic was such an extremely
rare event that will never be repeated in our lifetimes, silver’s
post-panic upleg was certainly not typical. So to
be conservative it can be excluded from our analysis.
After this secular bull’s fourth major upleg,
once again silver drifted sideways for the better part of a year. Finally in
late July 2010, in out-of-favor sentiment conditions much like this latest
July’s, silver’s fifth major upleg was
stealthily born. And it would prove a monster, ultimately skyrocketing a
staggering 176.6% higher over the next 9.0 months! Whenever silver regains
favor among traders, it just flies higher.
For our purposes this week, consider the average gain and duration of
silver’s major uplegs so far in its secular
bull. Excluding that anomalous post-panic recovery, silver’s normal
four major uplegs have averaged gains of 113.2%
over 7.5 months each. And even including that post-panic upleg
doesn’t change things much, the averages
merely shift to 113.6% over 8.5 months. Compare these to silver’s
recent gains.
Rallying merely 31.9% higher over just 2.7 months is truly nothing for
silver. I actually find these numbers very interesting. If you triple both of
them, it would take silver to a little under an average upleg’s
gains in just over an average upleg’s
duration. In other words, since its latest mid-summer lows silver is nearly
perfectly on pace with what you’d expect in a major new upleg running in line with the averages.
While technicals (price action) measure uplegs’ progress, sentiment governs their staying
power. When any price rallies too far too fast, it generates too much greed
and becomes unsustainably overbought. The excitement convinces all traders
interested in buying anytime soon to hurry up and deploy. This pulls all
near-future buying forward, leaving nothing but sellers. So the overbought
price soon corrects.
Has silver rallied too far too fast in the past few months? Is it
overbought with greed growing excessive? No, as most sentiment indicators
will reveal. My personal favorite is one I developed many years ago to trade
gold stocks in gold’s secular bull. It is called Relativity trading. It recasts a price like
silver’s as a multiple of its own 200-day moving average. Charted over
time, this metric reveals sentiment extremes.
Relative silver, or silver’s daily close divided by its 200dma, is
charted above in red off the left axis. As is usually the case within ongoing
secular bulls, rSilver has formed a very definite horizontal
trading range. We currently define this as support at 0.95x and resistance at 1.40x. In other words, when the silver
price slumps under 95% of its 200dma it is oversold and fear and pessimism
reign. That is the ideal time to buy.
Note that during silver’s recent correction after its stunning
parabolic fifth upleg, rSilver
plunged well under this support zone. Silver got so beaten down and unloved
over the year or so leading into this past summer that rSilver
was trading near panic levels. There was absolutely no reason for silver
traders to be as scared and depressed as they were during the stock panic, so
this fear anomaly simply couldn’t last.
And it didn’t. By late June when silver finally bottomed, rSilver was way down near 0.83x.
That was one reason we started aggressively buying silver stocks and
recommending them to our subscribers this past summer when few others would
touch them. Today the unrealized gains on these young short-term silver-stock
trades are already running as high as 87%! It pays big to walk the contrarian
walk with us.
While uplegs are naturally born when silver is
very oversold, they give up their ghosts when silver gets very
overbought. We currently define this danger zone in rSilver
terms at 1.40x. Once silver rallies far enough and
fast enough to climb more than 40% above its trailing 200-day-moving-average
baseline, greed and euphoria are so excessive that the probabilities favor an
imminent correction. That is when to sell high.
In April 2004 as silver’s first major upleg
peaked, rSilver was running 1.448x.
This secular bull’s second major upleg
topping in May 2006 was radically more extreme, briefly stretching rSilver to 1.651x when that upleg
finally crested. A couple years later as silver’s third major upleg peaked, rSilver was
running at 1.465x. Before that epic stock-panic
discontinuity, major silver toppings were consistent in rSilver
terms.
But since the post-panic recovery took longer than a typical silver upleg, rSilver only hit 1.294x in early December 2009. Speculators were so heavily
scarred from the stock panic’s huge losses that they weren’t
particularly enthusiastic about anything including silver for years after.
Once again this post-panic upleg wasn’t
normal, and can certainly be excluded from the averages in order to stay
conservative.
Later on the first normal post-panic upleg
that went parabolic at its climax certainly did rekindle euphoric greed in
speculators. rSilver shot
up to a staggering 1.747x at its April 2011 topping! If you average all these
past major upleg toppings, they show an average rSilver crest of 1.578x not including the initial
post-panic-recovery upleg. Even including it
doesn’t change things much, the topping
average merely shifts to 1.521x.
At Zeal we start looking to exit our silver-upleg
silver-stock positions whenever silver stretches 40% above its 200dma, it has
simply rallied too far too fast to be sustainable. And the average upleg topping that marks the greed and euphoria climaxes
is a bit higher still, let’s call it 55% above silver’s 200dma.
Why is this relevant today? Look where rSilver was
trading this week even after its recent sharp surge.
At best, rSilver merely hit 1.141x!
Silver was only 14% above its 200-day moving average this week. As the chart
above shows, this is simply nowhere close to being overbought in the context
of silver’s own secular bull. With rSilver so
low in its secular trading range, there is probably effectively zero chance
that silver is carving or will soon carve a major interim high. Its upleg is probably just getting started.
And provocatively even this 14% read is somewhat overstated. Since my
Relativity trading tool is based off of 200dmas, whenever a price crosses
back over a falling 200dma after a particularly large correction the
readings look higher than normal for a new upleg.
We saw a similar sharp surge in rSilver after the
stock panic and the falling silver 200dma it generated. Then, like now, rSilver overstated greed growth.
Silver considered in proper secular context today looks exactly like a
young new upleg. Its gains in the past few months
have not been excessive by bull-to-date upleg standards, in fact they are tracking perfectly with what
you’d expect in the first third of any major upleg. And these benign technicals
are confirmed by sentiment reads like rSilver.
Silver sentiment is actually still closer to fear than greed, just emerging
from deeply-oversold panic-like fear-laden levels.
So while silver might need to weather a minor pullback in
the near term, it is nowhere near major topping levels. On a weekly basis
silver may indeed be a little overbought, and this metal tends to exhibit a seasonal pullback over the next couple weeks
anyway. But on a monthly basis, the context that matters for gaming its major uplegs, silver
is nowhere near being overbought. Greed has yet to wax extreme.
While the technical and sentimental cases for a new silver upleg being underway are compelling, there is another
major reason why silver ought to continue rallying a lot higher. Silver
remains pretty undervalued relative to gold, its primary driver. This next
chart revisits the Silver/Gold Ratio, which reveals silver still has huge
potential to run higher in the months ahead even if the best gold can do is
grind sideways.
Fully explaining this chart here is beyond the scope of this essay, but I
did discuss it in depth in late July when silver remained quite undervalued relative to gold. This was one
of the main reasons we added cheap silver-stock positions and advised our
subscribers to do the same last summer. And interestingly despite
silver’s strong surge in recent months, this white metal still remains
undervalued compared to the yellow.
Prior to that epic panic anomaly, the SGR averaged 54.9. In other words,
it took 54.9 ounces of silver to equal the value of a single ounce of gold.
But like any secular relationship, the Silver/Gold Ratio exhibited a trading
range that is shaded in blue above. It ran from 60 ounces of silver per ounce
of gold on the low side to 45 on the high side. The latter was seen whenever
silver regained favor among traders.
This week the SGR was trading around 51, still well below the 45
pre-panic resistance. Even if gold stalled right
here, the growing speculator and investor interest in silver thanks to its
recent rally ought to push it back up to a favorable SGR again in the coming
months. At $1775 gold, a 45 SGR implies a silver price near $39.50. But
gold’s seasonal
strong period is now underway, so it is likely to head higher.
And there’s nothing like strong gold prices to get traders interested
in aggressively buying silver to leverage gold’s gains. And if silver
really starts regaining favor again in a big way, the SGR can certainly go a
lot lower (silver gets more valuable relative to gold). In addition to the
pre-panic horizontal trading range, there is also a strong SGR uptrend that
came into play again in early 2011 as silver surged.
The midpoint of this uptrend is now around 33 in SGR terms, silver worth
so much that only 33 ounces are necessary to equal the price of an ounce of
gold. And if gold merely enjoys an average seasonal rally between this past
July and May, which is very conservative in light of the Fed’s new QE3
campaign, it will be near $1875 by spring. Plug a 33 SGR into this, and you
get an impressive silver price near $57!
I find this target very interesting because it dovetails in perfectly
with an average silver upleg. From silver’s
recent late-June major low, a 113% upleg would
carry it over $56 by next spring. While only God can see the future, there is
certainly no doubt that silver has great potential today. After such a
massive correction, the odds definitely favor silver’s recent advance
growing into a major new upleg.
And we’re certainly ready at Zeal. While silver languished near
major lows in mid-June, we launched a big 3-month deep-research project to find
the best silver stocks to ride the metal’s coming upleg.
Starting with well over 100 publicly-traded silver stocks, we spent hundreds
of hours whittling them down to our dozen fundamental favorites. The winners
are all profiled in depth in a fascinating new 29-page report hot off the presses last week.
If you are interested in buying silver stocks before silver’s young
new upleg really picks up steam, buy your report today. It is a steal at just $95
($75 for subscribers). Silver tends to have a minor seasonal lull over the
coming couple weeks, but it doesn’t last long. So the window to add new
silver-stock positions at decent prices is fleeting. And we’ve done all
the hard work for you in finding the best silver stocks.
Of course we also publish acclaimed weekly and
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The bottom line is silver looks to be in a young new upleg
today. While its recent gains appear outsized on short-term charts, they are
right in line with those seen in the first third of this silver bull’s
past major uplegs. Silver only recently bottomed
after a massive correction, the perfect breeding ground for its next major upleg. And despite its latest surge, silver remains far
from overbought levels while greed is low.
On top of this, we are still early in silver’s usual seasonal
strong period between autumn and spring. And this metal remains undervalued
relative to gold, the primary driver of silver speculation. So as gold
continues higher on central-bank inflation, silver should easily leverage its
gains as it races to catch up. And naturally elite silver stocks, which are
still largely unloved, will further amplify silver’s coming rally.
Adam Hamilton, CPA
September 22, 2012
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information.
Thoughts, comments, or flames? Fire away at
zelotes@zealllc.com. Due to my
staggering and perpetually increasing e-mail load, I regret that I am not
able to respond to comments personally. I will read all messages though and
really appreciate your feedback!
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