Sunday, January 08, 2012

Got Gold Report – Silver, You Ain’t Seen Nothin’ Yet

HOUSTON --  On the day after Christmas last year we shared with Vultures (Got Gold Report Subscribers) our commentary on the Commodity Futures Trading Commission (CFTC) weekly report of the commitments of traders (COT) in COMEX silver futures for the period ending Tuesday, December 20.  A few days later,  on December 28, we shared that review with our entire readership in these pages as a holiday courtesy.   In that review we said, as simply and clearly as our command of the vocabulary can convey, that “this COT setup is about as bullish as they come.”  

Since that report there have been two subsequent COT reports and the changes which have occurred and have been reported are in keeping with our view then that the positioning of the large traders of silver futures in New York:  “gives us cover to begin adding in our green target box for silver with reasonable confidence, for the first time in over a year, if only the Trading Gods will allow it.”  The green box on our tracking chart is visible in this reduced version of one of our silver tracking graphs we share with Vultures. 


One of our silver tracking graphs at Got Gold Report.  This is the 1-year, daily version which contains part of our weekly commentary in the dialog boxes.  The chart is actually quite a bit larger than shown and must be reduced quite a bit to fit this format.  Vultures have access to the full sized version any time. 


As Vultures already know, because they have constant access to all of our tracking and trading charts in the subscriber pages, we often use target boxes placed in advance on our charts to denote areas we intend to consider attempting a trade or to add to a position.  In addition to those target boxes, we also often add commentary directly in the various charts to explain our thinking as the events and conditions change.  It is a very effective way to convey how we are approaching the markets we track and game.  Our “green box” for silver in our tracking chart has been in the same locale for quite some time – ever since we adopted the “Giant Flag” consolidation theory of the silver market. 

Silver Enters and Bounces in “The Green” 

On Thursday, December 29, having broken implied $28 technical support silver headed south in a hurry in nervous, thin trading early (in the U.S.), entering our green target box for the first time.  As the trading neared the September panic spike low near $26.15 (actually the third test of $26 in 2011, having tested it in January and September prior) our instinct was then to set up a trade to fire the instant a bounce seemed to be in the making – so we did.  As if on cue, bidding flowed in to support silver at almost the precise area the September panic spike was exhausted (about $26.15) (in the pre-market hours for the Big Markets). 

For the first time in over a year we initiated a new silver trade that day, securing a long position in our predetermined zone of potential support (filled at $26.41), as Vultures already know.  What some new Vultures may not know, and longer-time Vultures may have forgotten, our last silver trade was stopped out about a year earlier in January of 2011, as we disclosed then on the blog. (We urge readers to review that linked post, if for no other reason than to review the January 20 2011 chart before continuing this offering.)

Silver’s 2011 Bounce at $26 Higher Than We Expected 

At the time, in late January of 2011, amid harsh profit taking for precious metals, including some of the heaviest negative money flow for silver ETFs we had seen up to that time, we had decided to target the area of a previous October 2010 flag consolidation for possible reentry (about $0.75 either side of $23 or so, as shown in the chart in the link above).  In other words, in January of 2011 we expected more of a retrace by silver than actually occurred, as silver then fetched up just above the $26 level and just didn’t provide us with a reentry we were comfortable with then. 

Consequently, except for our holdings of physical metal, we missed out on the run-up of silver from $26 to around $49 from January to April last year as far as our short-term trading was concerned.  It was about that time that we adopted our current attitude with regard to silver – that since we already hold a meaningful position in physical silver, we had the luxury to wait for an extraordinary correction before taking another shot with our short term trading. 

It should be crystal clear by now, but in case it isn’t, we believe that silver is in the midst of just the kind of extraordinary correction which allows us to put on a new short-term trading position – the first new trade in silver for us since August of 2010 (silver then below $19).  We think that the fact that silver has come all the way back down from its near brush with an all time high in April to as low as $26.15 is a bona fide opportunity.  Right or wrong, that is indeed how we have chosen to play it too.

Bull Market Second Chances

It is somehow fitting and proper, we think, that silver fetched up at precisely the same opportunity we did not take advantage of in January of 2011.  We welcome this second-chance opportunity with open arms and a new trade.  As always, however, we do so with a cautious eye and with our short-term trading stops always in play.  Our Vulture members know exactly where our stops are placed at all times, because they have access to our trading and tracking charts 24/7. 

Silver, You Ain’t Seen Nothin’ Yet

As we have said countless times, our short term trading has nothing at all to do with our holdings of physical metal, except as a vehicle to perhaps earn more resources so that we are able to add to our holdings of physical metal from time to time - opportunistically.  For now and for the foreseeable future, our holdings of physical metal are just not for sale.  (Except for emergencies, or for superb opportunities, when they arrive.)  Just below is just one small hint of why that is especially true for silver. 


Silver, weekly, since 2001. 

We are convinced, by a preponderance of all the available data to us, that even with the marginal increases in silver production over the past couple years, a structural imbalance between the combined overall global demand for physical silver and the quantity of available metal has been and is now developing.  That applies most especially to the available quantity of commercial sized, average 1,000 ounce good delivery bars which form the basis of the market price everywhere.  As a consequence of that imbalance we do indeed believe that over time the market will become more and more tuned in to it. We believe the market is in the process of re-valuing silver back to its historic relationship to gold metal because the forces which had artificially suppressed silver in the past have all receded to near zero.  

Nothing excites a market more than the notion that the commodity in question might be in shortage relative to demand.

Perversely, the idea that a commodity might be becoming scarce has the tendency to encourage higher, not lower demand.  It also encourages increased, not decreased speculation, hoarding, accumulation and, of course, it encourages higher prices as positive money flow takes hold (more capital flooding in to the market than flowing out of it).  When a commodity is in real (or imagined) shortage, it takes higher prices in order to induce holders of that commodity to part with it at the same time that users and producers anticipate and expect to have to pay or recieve more for it in the future.

Looking at the chart above, we have taken the view that silver is very likely involved in a giant flag consolidation.  A pause, a waypoint in a great trend of silver to reclaim its role as a truly scarce and valuable monetary metal, alongside its more respected and much more available yellow cousin, gold.  The process and the trajectory is choppy, for sure, but we think the trend is clear enough in the chart above. 

We cannot see the future and we do not know for sure what the price of the metal shall do just ahead, but if we are right about our view of the small, but vital silver market (we could be wrong, of course) … if we are right that the flag consolidation forming now is merely a correction … merely allowing the market to catch its collective breath and digest a new higher paradigm … to adjust to a new reality following the blow-off of the fourth parabolic advance of this Great Silver Bull Market (we call them definition moves) … if we are right Vultures and friends, then in the words of the Bachman Turner Overdrive, “You Ain’t Seen Nothin’ Yet.” 

Mother of all Mid-Point Consolidations  

It is somewhat ironic that last year when we were stopped out of our silver trade in the $28 region (with our then largest-ever profit on a single silver trade, more than $8 the ounce) after it had tested $31, we said then that we thought silver was likely then in a mid-point consolidation (it was).  But we had chosen a too-low reentry target then and missed the fulfillment of that call with our short term action.  Well, friends and fellow Vultures, there we were again with a second shot at that $26 opportunity on December 29, so we were not about to let that second chance go by.  And, once again, as we study the charts and all the available data, we are struck with the very same notion in an even bigger, more fundamental way.  We have to say it now, in January of 2012, taking appropriate anti-jinx measures as we do – Look at the chart, friends, and look at it well.  What we are seeing today very well may be the mother of all mid-point consolidations for silver metal.  

Indeed, as the chart above seems to suggest (at least it does to us in January of 2012), the silver market has advanced in a series of choppy parabolic surges, followed by long periods of “digestion” by the market, followed by a renewed surge of investor/speculator interest and money flow.  Silver has advanced from a period of artificially low pricing in the 1990s below USD $5; the aftermath of decades-long government dishoarding over-supply, investor disdain and apathy, which resulted in super low, sub-economic pricing … artificial pricing so low it encouraged a supply/production deficit for many years, literally reducing the amount of physical silver metal in storage worldwide by a factor of at least half. 

Silver has advanced from those stark beginnings up to challenge its all time roughly $50 nominal high set in a wild, parabolic spike and only very briefly nearly 32 years ago at the very apex of the last bull market for precious metals (which by the way was also the result of a currency crisis then). 

We think there are huge and compelling differences in the silver market today versus that previous bull market peak in 1980. We have mentioned them on multiple occasions over the years, but the short version is that compared to then world population has increased by about 50% (from about 4.3 billion to more than 6.8 billion souls).  The number of people that are able to participate in the silver metal bull market today is much, much higher today than in 1980 because so many of the people in Asia were prohibited from owning silver then.  Not only can people in Asia own silver today, the government of China actually encourages its citizens to own precious metals and even makes them available via state-owned banks.

We have not actually done the math, but intuitively the number of the world population which can own silver today is probably on the order of triple what it was in 1980.  Perhaps more importantly, the number of people in the world that have accumulated wealth enough that they could actually use some of it to purchase silver has grown exponentially since the liberalization of the former Soviet Union and China (to mention the two most important formerly hard-line communist states) … their at least partial embrace of capitalism has created enormous new wealth, some of which will seek safe harbor in precious metals … a worldwide trend. 

In 2009 Merrill Lynch estimated that more than 10 million people worldwide had a net worth in excess of $1 million USD, about 0.15% of the global population, but for the first time since records have been compiled the number of millionaires in the Asia-Pacific region (3 million) exceeded the number in Europe (2.9 million).    

In the 32 years since 1980 world money supply has increased by a factor of at least 10 and probably more than that, depending on which measure of currency one uses (we prefer M1 and M2 averaged), meaning worldwide there is something like 1,000% more dollars, yen, euros, pesos, francs, yuan, etc. in existence today versus 1980.   

So, if we consider that in 1980 silver was still under the influence of artificial government dishoarding oversupply (that no longer exists today), and despite that it managed to touch $50 then, albeit for a instant in time, then consider that today, in 2012 we have about 50% more people in the world and maybe three times the number of people who are able to buy silver, using 1,000% more currency to chase half or less the available silver metal – in world where one can buy silver instantly using a mouse click from their home computer, or the touch screen of their iPad or smart phone while playing a round of golf or attending a soccer practice from anywhere in the world. 

No wonder Eric Sprott calls silver 'The Investment' for this decade, having correctly given gold that distinction in the past decade.  Mr. Sprott can see and smell the same imbalance we are talking about and has moved into position for it in a very big way.  Indeed, with his recent shelf offering, we think Mr. Sprott’s next very large purchase of silver metal is more or less imminent.  Mr. Sprott can see the same chart we do.   

We think that briefly describes the growing imbalance which is developing in silver metal; the imbalance which underpins our staunch confidence in the second most popular precious metal, thinking longer term.  That is in part why we welcome these pullbacks and corrections for silver – because we know and believe they are opportunities for Vulture speculators like us. 


Right or wrong we have embraced the notion that silver is currently consolidating and digesting its most recent parabolic surge in a giant flag formation.  We, at Got Gold Report, are convinced that silver is in the process of reclaiming its historic relationship to gold metal as it rebuilds its global reputation and “goodwill” among the people of the world again. 

Silver has been money almost as long as gold, if not even longer.  We think it will be again, in the not too distant future, albeit in a ratio closer to its historic average of something between 15 and 20 ounces to one ounce of gold instead of its current 56:1 ratio.  But that is a different story for another time.    

There is, of course, much more to the story than just this tip-of-the-iceberg look, but that’s enough for one Sunday offering.  Vultures kindly log in to review our newest commentary on the charts.  We considered doing a full Got Gold Report one week early this week, but there were only insignificant changes to the data this week, most of it being skewed by the holiday, and we felt that this particular offering belonged in the public domain immediately. 

That is all for now but there is more to come. 


Edit January 9 at 00:50 CT to attempt to add a larger version of the first image by request.  Try clicking on the image below for a slightly larger version, but the limts of the image program prevent a full sized version of this very large chart.  The pop up is the largest this program will allow. 



The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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