Another Silver Market Bottom? More Technical and Cycle Analysis!

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(17 May 2012)

I think silver and gold are at or very near an important bottom.

  • The gold and silver markets are acting like they were in the 2008 crash – going down when nearly everything points the opposite direction. It turned out that the 2008 gold and silver crash was much more extreme than would have been expected because traders, large banks, hedge funds, etc. were dumping gold and silver contracts to raise cash to meet margin calls for their other holdings – mainly stocks. This time I think the same is happening to meet margin calls on sovereign bonds and currencies. JP Morgan just announced a $2Billion (or more) loss – there are probably many others and more losses that will be announced in the near future.
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  • Thanks to Europe, etc. there is a fear of deflation and collapse. Hence, oil, gold, and silver have tanked, and the buck has risen. Probably all are about ready to reverse.
  • The Euro has been weak, and consequently the buck has strengthened slightly – hurting gold and silver.
  • Silver follows, more or less, a 62-week cycle of low to low. Starting with the 2006 low, silver hit subsequent lows 1 week early, on time, 4 weeks late, 7 weeks early, and 1 week early, assuming this week is the low. The cycle is a long way from precise, but it does indicate that an important low is due. Typical moves (low to high) subsequent to the cycle lows were 75% to 100% up.
  • The XAU/Gold (gold stock index to gold) ratio is at a 22-year low (extent of my data) – probably the lowest in history. Gold stocks (and silver stocks) have been slaughtered, and I can’t see any fundamental reason for it. I expect a large rally in gold and silver stocks in the next 12 months.
  • The COT weekly Risk/Reward Index (my version) is at a deeply oversold level and indicating a substantial rally is due. It was more oversold in 2008, and last December, but otherwise, this is about as low as it has been in many years.
  • The daily version of my swing trading indicator is also deeply oversold and indicating an imminent rally in silver.
  • It is said in the world of traders that "gaps are always filled." This is not absolute but seems to be true nearly 100%. In this case, the daily chart of SLV just filled the last gap: close on 12/30/2011 was $26.94. It "gapped up" on 1/3/2012 to $27.92. The gap was from $27.71 to $27.92. That gap was filled on Friday 05/11/2012.
  • Gold has a fairly clear 21-month cycle, top to top, that has worked for most of a decade. The next high is due in May 2013 – call it 2013Q2. So, there should be a strong "tailwind " for gold, silver, and gold and silver stock investments for the next 12 months. I think this is important.
  • By any of nearly a dozen measures, sentiment toward gold and silver (and oil, corn, wheat, and other commodities) is at exceptionally low levels, ranging from multi-month to multi-year, to all-time lows. Sentiment gets this low when markets have been down for long periods of time, are "sold out" and people are tired of them, forced out, broke, or fed-up. This is similar to the S&P in March 2009 and the opposite of the Dow in early 2000.
  • "Quantitative Easing to Infinity" will be important for the next many years. The US government will not run a surplus for the foreseeable future, and since borrowing is increasingly less likely, the Fed will be forced to monetize the US government debts even more than they have for the past several years – over 60% of the bonds recently sold have been monetized by the Fed – money printed from "thin air." It will get worse, and eventually (probably soon) this will be reflected in consumer inflation and the prices for gold and silver. If your currency is going to become near worthless and you know it, what will you do for survival? (Ask those who lived through the last several devaluations in Argentina and hundreds of other countries.) Eventually it will dawn on people that they must conserve their purchasing power, and one of the best methods is buying (with depreciating dollars) something of lasting value – gold, diamonds, silver coins, select real estate, etc. Sometimes stocks will be a good vehicle, sometimes not… Or we can trust Congress and The Fed to take care of us…
  • David Stockman’s investment philosophy: "ABCD" which is short for "Anything Bernanke Can’t Destroy." He is worth listening to….. especially now.

None of the above guarantees that silver or gold must or will go up this week or this month, but they strongly indicate that an important low is here or near. I am not selling, and I am waiting.

The last time some of these conditions were met was 12/29/2011. I consider the conditions today as much more bullish than in late December. Subsequent to that December low SLV traded up $10.79 in two months (up 42% low to high) before it was slammed down again to this week’s low around $26.00. I expected the rally; I did not expect a second slam-down that lasted this long and went this low. Surprises happen! I now expect a substantial rally in gold, silver, oil, etc.

There are no guarantees in markets and certainly the economic and political world gets more crazy each month, but indications are solid and strong for a silver and gold rally soon – from here or near. It is an election year. The Fed will crank the money supply to assist the sitting president into another four years. Investors will notice.

GE Christenson
aka Deviant Investor

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