Silver Market Bottom? Use Technical Analysis for Insight!

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(December 25, 2011)

Conclusion

Silver indicators are at once or twice per decade lows. In every similar case, these conditions have marked excellent long-term buy points for silver (and gold). Silver is currently about $29 (SLV is about $0.75 less) and gold is approximately $1605. These prices don’t look like bargains compared to their 2001 lows, but they definitely are “bargains” compared to earlier in 2011 when we saw highs of $49 in silver and $1923 in gold. I strongly expect that current prices will look low compared to year-end 2012 prices – based on the technical analysis and the velocity of money printing throughout Europe, the UK, and the USA. NOW is a long-term buying opportunity in both gold and silver – especially silver. For the short term, silver will give a strong buy signal on a close $0.30 above the current price, which could be any day this next week.

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The Analysis

I look at many technical and fundamental indicators that predict approximately where silver and gold are at in their low to high to low swings in price and sentiment. In general, buy when the sentiment is very bearish (like now for silver and gold) and sell when everyone thinks silver and gold (crude, the S&P, real estate, etc.) are going up forever. This sentiment can be measured with objective and analytical techniques.

  • The silver to gold ratio is at a 15 month low. The ratio has some value, but much more important is the Relative Strength Index (RSI) of the ratio – specifically the 21 week RSI. This indicator oscillates between 0 and 100 and currently is at the second lowest in 13 years. This RSI of the ratio has an EXCELLENT record for predicting the weekly lows and a decent record for identifying the highs. Current status at the lowest since the 2008 crash and second lowest since 1998 is wildly bullish.
  • The COT (Commitment of Trader) data provided by the US government tracks the reported positions of the large commercial and non-commercial buyers and sellers in the various markets. I follow the silver COT data. The Commercials position data is currently at the lowest level for longs since November of 2001 – when silver hit a significant low of $4.01 per oz (seems impossible now….). This is strongly bullish, based on historical correlation between price and the Commercial Long positions. The smart money is least short and most long at market bottoms. It is never wise to fight the big money – best to ride with them, and their data is currently flashing strong buy in silver.
  • The COT data showing the positions for the Non-Commercial traders, less the positions for the Commercial traders is a similar indicator that follows the relative highs and lows for silver. This number for Non-Commercial minus Commercial net long positions is currently at the lowest level since 2003 – another excellent buy point. Strongly bullish!
  • I use a weighted index of various indicators, including the COT long data, the RSI of price, the comparison to moving averages, etc., and I call this a Confidence vs Risk Index. This weekly index is currently at levels that are second lowest since March 2001. The lowest was at the crash of 2008. This C/R index correlates very highly with the price of silver and indicates that current prices are at major lows and very likely to move much higher in coming months.
  • Taken all together, the above ratios, indicators, and analysis, along with other analysis and indicators clearly indicate that silver (and gold) are at major lows and likely to move much higher. This time could be different, but it seldom is, especially when fundamental analysis of mine production, industrial usage, investment demand, and current monetary policy (print lots of money to bail out banks and insolvent governments) and current fiscal policy (borrow and spend lots of money to buy votes and disguise economic weakness) all indicate higher gold and silver prices in the foreseeable future.
  • Gold statistically correlates with silver about 95% on weekly prices. A strong buy in silver (this is) indicates a strong buy in gold also. The size of the rallies (and crashes) as a % of price is much higher in silver than gold – it is more volatile and a smaller market. So if you are hesitant to buy silver, then buy gold, or their ETFs.

What could go wrong?

  • Central Bankers could slow the money printing and force the world into a deflationary depression. This would hurt (short term) the price of silver and gold. I consider such action as highly unlikely, since their primary tool for market manipulation and profitability is money printing.
  • Governments could also initiate policies that would create a deflationary depression. Voters would be angry, and there would be blood in the streets. Politicians would not be re-elected. Seems unlikely.
  • Large financial forces could sell into the market and force it lower still. This could last for a few more months before the market in silver and gold exploded, much as it did after the 2008 crash. The technical indicators were strongly bullish at the end of September this year (even more bullish now), and I expected a good rally from October through now. Silver and gold did rally, but then fell to a near test of the September lows in mid-December. I think the recent fall in price was heavily influenced by the collapse of MF Global. This could happen again, though it seems unlikely.

GE Christenson
aka Deviant Investor

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