Tuesday, January 12, 2010

A (Bearish) Technicality of Silver

Don't get me wrong: I love silver - I have for as long as I can remember.  There is just something about the oft-mystically-mentioned white metal that attracts me.  Maybe I hate vampires (that new Twilight craze certainly hasn't added any vampire merit points), or maybe I just like high electrical conductivity and a pure looking luster.

There isn't really one single thing about silver that I like the most - but there is one thing about it that I don't like very much of late.

Silver is far too expensive.

Now, before you fly into a flurry of arguments about how "silver is real money" and debt denominated instruments are "worthless pieces of paper" (which is actually untrue because they are not only worthless, they are of negative worth, because they are debt), and how it is one of - if not the - most widely used metals in the world and demand for its application can only go up as the developing world's middle classes emerge and demand more electronics and such....

Before you say any of that, you have to understand what "expensive" is.

Expensive is a relative term.  A Mercedes SL500 is expensive relative to a basic Honda Civic.  Gold is expensive to silver.  A new computer relative to a ceramic mug.

Or relative strictly in dollar terms.  Sometimes something is simply expensive all on its own.  Now again this is in perspective - when I say it is expensive I could be saying "it takes too much of my labor or free resources to acquire an ounce of silver."  That is certainly part of it.

But the other part is that it is expensive when you measure it in terms of market psychology.  In terms of market psychology silver is very overpriced - not too say that people aren't buying, because they are (reading the latest C.O.T. report  should give you an idea.  You can view it HERE. - specifically, grab the number of weekly open contracts, chart them and do an overlay with the price of continuous contract.  Surprise surprise!)

One little study I did on silver recently was using RSI divergence from price.  I have used this before (our short recommendation on AIG using RSI and Money Flow), to some success.  This is of course not my primary piece of data used to determine silver is starting a multi-month downtrend that should make a lower low than October 2008, but its another piece of the puzzle that I have kept track of and is fairly compelling.


Here's an example of what I mean:





















Silver has experienced a fairly large period of both RSI and MACD diverging from the price movements - as prices went higher and higher, both of these strength indicators steadily declined. Now that the uptrend has been broken with conviction, we should see a much faster and further fall in silver prices than we did in '08. 

Lucky for me, I have thought silver was too expensive for some time now (seeing as we are in a period of deflation, no matter how people clamor at the utterly temporary uselessness of the Fed's money-printing and say it is immediately grounds for silver to go to $50.00 / oz and gold to $3,000.00).

As such, the strategy is to accumulate a hefty batch of  "worthless" FRN's which I plan to exchange for said real money once silver has found a bottom.  One of the indicators I will be looking at to indicate a good buying opportunity for the precious metal is a solid price/divergence in RSI and MACD.

I'll keep you posted.

Best of luck and be safe in the cold weather.  While your teeth are chattering away, be consoled in this little tidbit of information...

Derek.

14 comments:

  1. DEREK
    Your smoking a little too much of the hoochie goochie.The metal is still underpriced.Thank the the big banking boogies for that.All I can say is got bless them and if Silver too expensive then I guess Ill just keep squandering my money on accumulation of this asset.

    You may be right nothing is black and white but I take the plunge.
    Peter

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  2. Derek

    I totally agree with Peter, we are going to see 20.00 silver within the next two months. Wanna bet? Ron

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  3. I think your analysis is right on the money. There will be higher prices, by and by, but now there is substantial risk of a steep drop.
    Steve

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  4. who is this fool?

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  5. Ummm... Ok lets be kind to Derek and his interesting viewpoint. It is bold to claim now what he says in the face of the majority herd opinion. I am personally in the herd camp since it makes sense right now for various reasons... So thank you Derek for your angle. China has tightened their reserve requirements and this bodes ill for world macro credit. The effect has about a 2 month lag. This will hurt. So we see...

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  6. Let the market prove it wrong - All I see are the higher highs and higher lows. Secondly, with PMs, there is usually a big spike in the end before it starts to fall (look at Feb 08) on your chart. Additionally, gold and silver are hyped up right now, there is still a little bit of fire power left - my guess is that it should go above 2008 peak if the Fed keeps the rate at 0.

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  7. Yes the Fed has already announced on Jan 7 that all member banks should be prepared to be able to do business (and survive) in an environment of higher rates. This is basically their backward way of painting a billboard sign warning of higher rates to come. Probably sooner that not. So when is the question. Agreed, the PM have some power left in them in the short term.

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  8. Dear Derek,

    Your only hope is to get a job with the government. Don't hesitate for even a second. Homeland Stupidity has a place for people like you. Good luck.

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  9. Folks:Derek might be too early, but from following the PM market for a while, usually around May/june is when we either top out or bottom. Take your pick. Silver has a close relationship with the S&P 500. If the general market is topping out now Derek is probably right but as we know seasonality factors have been distorted lately by the fed. With elections coming this fall, the seasonality factors could be distorted also. Maybe Derek can comment on this further.

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  10. Yo Derek,
    You may be omitting the traditiional and oft historical bigtime lag of silver to gold. Silver usually is a very late stage popper, then buster. I think here odds favor, you are wrong in the short to intermediate term. The big 'if' is IF we get the final late winter/ early spring peak of $1300-$1500 gold, silver will do far better in percentage gains, via the ratio. The telltale signs are atarting to confirm now at about 61:1, and more certainly when 59:1. Silver has the capacity, thinness, and will to race near 50:1 before the seasonal peak is done, breaking above $25 @ $1300 gold. But after the ides of March yes I would say, watch out.

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  11. I think the poster, and those commenting may be right. I think that as a matter of supply and demand, we don't know how much physical silver is out there...we have a pretty good idea of what has come out of the ground for the past 20-40 years, but some governments and the wealthy may be hoarding it worldwide. When Silver does(and it will) hit a value around 20-25 an ounce, the market will be flooded with silver from these unknown sources, causing the price to plummet(temporarily). But the demand for silver will stay steady and the price will rebound to at least that mark or more...and this cycle may continue until all the "unknown" silver is flushed out...I predict a very volatile rise which will make many investors lose their stomach during the ratchet and reset of the price along the way...which will provide some good opportunities to buy, even during the rise. I will predict 2 prices for silver this year...back down to 14/oz during the 2nd and 3rd quarters, and back up to 18-20 by the end of 2010. Time will tell.

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  12. Derek, Here is the plan,we buy puts on all the silver stocks for the next 6 months, and then when silver crashes, we buy calls, we going to make huge profits, is that your crazy plan. I bought most of my positions in October of 08 when they were super cheap, that was your chance, no going to happen again, this is a classic "wall of worry" bull market, the only way to profit is to hold and ride it out if you have the guts.

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  13. As painful as it is. Had I listened to what my gut was telling me, I would have aknowledged that silver is heading down. Instead, I bought into the long term outlook on inflation story. Derek is right...

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  14. January 12, 2010
    Derek B. wrote:
    "silver is starting a multi-month downtrend that should make a lower low than October 2008"

    Nope. $18.27 was today's high (April 7, 2010). However, shortly after your article was written ag did fall 3 bucks over the course of a few weeks, but it's now back up to around the same price range when you wrote it. Have you since retracted? If so where can I find it? If not can you explain where you went wrong, and what your thoughts are now for where ag is or isn't heading?

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