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Silver Analyst
Posted Dec 23, 2015
I would like to tell you about a proprietary indicator that I use in the
precious metals market. Take a look at the chart below which shows the
indicator against the price of silver (in green) since 1967.
The graph shows the leverage that silver achieved over gold over a rolling
four-year basis. I have addressed the subject of the gold-silver leverage
ratio in previous articles, but this indicator uses a different approach to
calculating the relationship between gold and silver prices. Note that this
chart peaks on various major occasions in the last 48 years.
The first of those peaks is near the top of the 1968 "Johnson"
spike when silver doubled in price after the USA government went off silver
coinage. The second is near the well-known 1980 "Hunt" spike. The
third is near the 1998 "Buffett" spike when Warren Buffett
purchased nearly 130 million ounces of silver. Finally, two more peaks occur
near the February 2007 peak and the April 2011 peak at $50.
Three false peaks occurred in January 1970, July 1976 and December 2012,
and I say “false” because one would have exited silver for other reasons
before then. Or one could take the view they were final warnings to get out!
Each time that the four-year leverage breached our sell threshold, that
particular bull market was over for a number of years. No matter how high the
price was or how long it took to get there, the leverage number peaked just
above the 1.50 level. Our thesis is therefore simple; sell silver and gold
when this rare threshold is entered. What is the reasoning behind this
indicator? There are four pillars to this theory:
- In a precious metals bull market, silver will tend to
outperform gold.
- However, there is a limit to which this silver out-performance
can go.
- This limit is hit at the top of major silver bull
markets.
- The reaching of this silver limit tends to also be the
end of the corresponding gold bull market.
For example, back testing this indicator, you would have got out 3% below
the top price of the 1968 peak, 12% below the 1980 peak, 6% below the 1998
peak and 3% below the 2011 peak. Using price per ounce numbers, this
indicator flagged a sell five days after the 1980 silver bull peaked for a
closing exit price of $37 as opposed to the closing $42 on the 21st January
1980. Sad to say, the majority failed to get out at such a high point.
Based on 48 years of historical data, We believe this indicator is useful
in determining silver and gold tops. However, the next major top in silver
seems a long way off, but at the other business end of the chart, we see that
the indicator is at a low which has only been seen twice before in 1972 and
1984. One of these triggered before the greatest silver bull market ever and
the other triggered at the other side of it as silver was obliterated during
the disinflation of the 1980s.
What multi-year move in silver does this major low presage? My money is on
a major move up in silver into the next decade.
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