The fall out

After the bloodbath of the past few days, as we try to evade the ravens circling overhead, let's remember that what does not kill a secular bull market only makes it stronger. A very similar sell-off to this one happened in 2008, silver falling from $22 to under $9. Yet the sell-off could not kill the silver bull, so it emerged even stronger for its next move up.

But that move up didn't start for another year. A chemistry analogy here is apt. Knowing the final outcome of a chemical reaction tells us nothing about its rate. The final outcome of a piece of paper is disintegration, as oxygen slowly eats away at it. But without the right catalyst (e.g. a match), though the paper will slowly turn yellow and start cracking into fragments, it will still be recognizable as paper for a very long time. So can it be with fiat currencies and the value they lose over time. PM bugs are confident that the dollar will eventually achieve its intrinsic value and equilibrium point (i.e. zero), but they should not extend this confidence to where it does not belong: the rate of its decline. Depending on the catalyst, the dollar can collapse tomorrow, or it can take a decade. Or longer.

In that regard, my gut feeling is that silver will be dead money for a while. It will not be making its way back to $40 any time soon. The chart is just too atrocious, the psychological damage of a 25% decline in 36 hours too scarring. I suspect some kind of foul play, because even Enron didn't crash that fast as revelations of the most egregious fraud emerged. There's an almost comical, artificial aspect to the price action of the past 2 days, but I'm not really qualified to speculate about the eminence grise behind the curtain. A commenter on Kid Dynamite's blog asserted that claims for silver's irreplaceable industrial usefulness are quite exaggerated. If so, then the violence of the price action could possibly reflect silver's industrial expendability + its still somewhat tenuous position as a safe haven relative to gold. Could we be confusing industrial potential with industrial usefulness?

Regardless, at any point in space and time, past and present, a silver coin has been (and is) regarded as something valuable, the way a gold coin is. So, while I'm not quite convinced of Sprott et al's claim that silver is the investment of the decade, I think if gold has plenty of upside, silver will at least follow it. And if, upon following gold up, it breaks $50 … watch out.

In that spirit of optimism I will present a bullish silver chart (bullish if silver does not fall below 30, which I give less than 50% odds). Back in June, I had a post titled "Silver 2003- ????" where I drew two trend channels in two different ways. I've been going with the steeper trend channel since then (mostly because it fit the weekly data better), but the less steep trend channel now looks better:

Now, we could break the lower blue trend line and be stuck in 2008-like doldrums (which I think is more likely). But, if we don't, precedent tells us that we will jump to the top trend line within 5-10 months, by which time the top trend line will be well over $50. So let's hope support around $30 is not broken next week!

And, so as not to expend all my optimism on silver, here's the monthly chart for gold. Frankly, a red month here is healthy, especially if we don't go below the August's starting point, when we first broke out of the wedge.

But my more sober prediction is that we will move to at least the 144-day MA (pink), currently at $1580, and thereby slow the ascent of that MA and the 200-day (green) as well.


Jeanne d'Arc said...

Great work, GM.

Let's not forget that Monday is the last day before options expiry AND the first full day following the margin hikes. So what chance silver staying above $30 tomorrow? Not great, I would've thought. On the other hand, surely every great crash deserves a dead cat bounce?

Gold - perversely - looks good. Perhaps a bit more retracement, than back in it's original groove of a slow-and-steady rise as currencies devalue. I imagine a ton of buyers waiting at the 144 MDA. I'll be one of them.

GM Jenkins said...

Gold sliced right through the 144 day MA last night but spent *very* little time below it, so I think it can be said that --so far at least -- that level has held

Re: silver:

The drop down to $26.11 last night was truly a sight to behold. A drop of ~40% in just 2 trading days and change! A silver lining though: knowledge is good, and the unprecedented rate of silver's decline has clarified things; it has made one of two possible scenarios far more likely than any others.

(1) Silver has been in a major bubble. We must concede that what the Jon Nadlers of the world have been trying to tell us was true all along, but we were too caught up in a mania to listen. The past 5 months have been the "bull trap phase" on the canonical bubble chart; a few tepid and short-lived rebounds notwithstanding, we are on our way to "overshoot" to the ~$12-15 level, after which a 30% recovery to the high teens will probably occur. We will stay +/- 50% of those levels for many years (burst bubbles are burst bubbles, after all). Future economic historians will relate these events to their readers, at our expense, for laughs and lessons. There will be a general acknowledgement that, sure, silver has industrial potential, but it's not as indispensable as the silver hypers were shouting from the rooftops; moreover, there is plenty of it to go around for a long, long time to come.

Or, (2) silver is so important to the powers that be, that what would have been perhaps a 20% correction over a few weeks has been engineered into a world historical 3-day collapse (world historical especially when you factor in the fact that (a) there's no obvious supply/demand news, such as a giant silver asteroid hitting earth, and (b) other assets that usually travel in sync with silver have not had nearly the kind of three day pummeling, which has truly been a sublime thing to behold).

So we'll find out soon if one of these two scenarios is the right one. If silver is still winding around its old $8-$22 range this year and for years to come: it was a bubble. If it is back at $40 any time soon, i will take it to mean that this was just another gambit by our central banking overlords and our rent-seeking parasitocracy to manage perceptions and transfer wealth to themselves.

Louis Cypher said...

Another view with some charts here

Overlaying historical with current doesn't always work. It's worth a look see though as another possible future.
The rapid decent on nothing but TA Fib #'s possibilities seems a little insane right here and now. I am not even close to tempted to cash in anything.

The Comex data might be interesting for a change.

Usually when we get a beat down it is setting the stage for some bullish piece of news for the metals. Using that logic then we are going to have some very interesting news this week.

GM Jenkins said...

That's an interesting chart Louis, thanks.

Jesse's Cafe today has an interesting perspective, as well.

"As an aside, I think that anyone who thinks this is just a routine market correction, based on the charts, is not looking at the actual market action, which is highly suspect from any number of dimensions.

But in particular the unloading of large amounts of contracts in the least liquid periods of the 24 hour trading day is highly suspect, and there are far too many 'coincidences' occuring for an intelligent person to blithely dismiss. I do not mind anyone ignoring such information but to dismiss it in the most haughty of manner is not becoming.

And of course for the 'I told you so' crowd that comes out on every correction, well, what else can one expect.

But we are in a currency war, whether one realizes it or not, and this has been a 'shock and awe' exercise I think along with other dramatic fiat currency adjustments, especially the Swiss franc.

The Bankers will have their way, until they do not. So let us please exercise caution. I have said, 'wait for it.' I hope that now this lesson is embellished in your memory. "

GM Jenkins said...

^^ Jesse of course means "embedded in your memory", not "embellished"

[pedantic, i know, but then Jesse deserves it for his pretentiousness]

PianoRacer said...

Leave Jesse alone! His word choice is his pejorative.

As for the "silver is in a bubble" meme, I just haven't seen any evidence whatever for it, other than it's dramatic increase in price, which is a necessary but not sufficient condition. Ultimately though, the bankers game will work until it doesn't. I happen to believe it will break down in the very, very near future, but I am prepared to wait a decade or longer if necessary, but then I have that luxury while many others do not.

Anyone buying silver with a time horizon shorter than that, well... the best of luck to you. This past week has demonstrated incontrovertibly, at least to me, the uselessness of TA in a rigged (or any?) market, as well as the continuing disparity between what the "spot price" of PMs is and what they are worth to me (all value is relative).

Louis Cypher said...

Simple questions to the buy and holders of Silver which may help clarify where we are.

Currently Silver is at 30 bucks.
Are we more likely to see $35 or $25 first?
Step that out .... Are we likely to see $40 or $20 first.
Step that out just a little bit more. Are we likely to see $45 or $15 first? $55 or $10?

Depending on how you answer those questions should give you the courage to make a move one way or another and live with the decision.
Answer these question correctly and you too can charge $500 per month selling news letters.

GM Jenkins said...

His word choice is his pejorative.

Haha good one!

That's a great way of looking at it Louis. If I go only with the abysmal chart pattern and apply Occam's razor (no need to invoke manipulation if price action is possible without it), I can't see $40 silver any time soon. But then - if silver's at $10 - I'm not big on buying a lot of physical silver (not least because it's so bulky), but I'm buying enough monster boxes to build a bunker.

Even silver in its 2009-2010 range of $10-$20 always "felt" really cheap to me. That's barely enough to pay for a burritos and drink at Chipotle or a cab ride up Manhattan in traffic. If all those daily transactions had to be paid using silver, all the silver in the world would probably have to be in Manhattan. Obviously silver is no longer money, but I don't think the thought experiment is frivolous, because silver should have a strong store of value component, so it should technically "keep up with inflation" and always be use-able as money.

Louis Cypher said...

I can't take credit for that piece of wisdom but happy to pass it on.

I still feel that we do get beat downs ahead of bullish for metals news. Based on the insanity in Euroland I can only assume they are either going to print like Ben or get Ben to print for them.
"Firewall Greece" ... crap. What does that even mean in practical terms? I'm serious WTF does that mean?

"Ban Short selling" ... waste of time.

"Euro Bonds" ... It will take massive arrogance to push this one through. Not in short supply in the EU if you read some of the statements and actions of guys like Olie Rehn. It will take time though. It's guaranteed the Finn's etc. have a plan B if this happens.

More local bond issues and reciprocal reach arounds. Easy, but just creates bigger problems and more systemic risk.

The easiest route is the Fed as a short term solution.

Obviously Gold was over bought but Silver not so much. The charts do say Silver is dead in the water but the charts can't read the insane volatility in Silver or the insanity of the politicians. Maybe Armstrong, Cliff High or a genius Elliot Witch doctor can but I sure as hell can't :) so I have to stick with the Ocram's razor.
The cheaper you make it the higher the physical demand in the short term. Physical demand will translate into higher prices.
If it stays at this level physical interest will wane.
If it starts to take off again then physical interest will pick up again as people chase the price.
Heads I win, tails I win. Lands on the side of the coin then I neither win or lose. Insurance still in place.