 Tactical
Silver Trends 4
Adam Hamilton
Archives
Jan 6, 2006
Due to its relatively small
global market, its hyper-volatility, and its proven historical
potential to multiply capital many times over, silver remains
a beloved favorite among countless investors and speculators.
With silver closing above $9 this week for the first time since
April 1987, we silver fans have much to cheer about.
While you wouldn't know it
from watching silver march higher with a vengeance over the last
two months, the metal really struggled for the vast majority
of 2005. In late August, when it dipped to an ugly $6.67 close,
silver sentiment was about as pessimistic as I have seen it since
its current bull started galloping in early 2003.
Four trading days after those
troubling late August lows, when silver still languished under
$7, we published the September issue of our Zeal Intelligence
monthly newsletter. It was titled "A Silver Lining"
and discussed the rather lackluster behavior of silver. At the
time I penned the following thoughts on silver's plight
"After watching silver
grind lower day after day in August without respite, I was joking
around with my partners telling them I was going to write an
essay on it, "Silver to Zero". It wasn't that silver
was falling particularly fast, it was just falling for seemingly
endless days on end. I suspect such dire misfortune is enough
to bring tears to the eyes of even the most fanatical and rabid
silver investors."
"Why is this so irritating?
No other major commodity has more potential for legendary gains
in this ongoing primary commodities bull than silver. Silver
is totally unique among all commodities. The market is extremely
small and global silver stockpiles are dwindling. Its supply
and demand fundamentals are dazzlingly bullish."
"Most of the world's silver
mined today is a byproduct of base-metal operations, so no matter
how high the silver price goes the majority of supply is inelastic.
Industrial demand is also highly inelastic, very unlikely to
fall on rising prices, because silver sports unique chemical
and physical properties that make it irreplaceable in all kinds
of products."
"And since each unit only
uses tiny amounts of silver, the silver price could rocket without
really affecting the final price of manufactured goods. And silver
has long enchanted speculators. The higher its price goes the
more speculators lust after bidding on it. This creates a demand
curve that is inverted. Rather than acting conventionally and
retarding demand, higher prices accelerate it."
The rest of this 9/05 ZI letter
went on to discuss silver, including why it was stuck in the
doldrums, addressed silver manipulation concerns, and offered
a thesis explaining why silver should recover and surge in the
autumn on renewed speculator interest. As I rejoiced over $9+
silver this week, I thought about those dark days back in August
when the metal seemed to be spiraling into oblivion. How times
change in the always-exciting financial markets!
Since silver was so lackluster
for most of 2005, I hadn't updated this Tactical
Silver Trends series of essays since early last March. But
with silver accelerating to awesome and inspiring 19-year highs
this week, the time is certainly ripe to take another look at
the technical nature of silver's young secular bull market. The
charts this week are updated from those earlier essays. Silver's
primary trend remains very bullish.
When studying financial markets,
perspective is crucial. Thus silver's current tactical trends
are most easily understood in the framing context of its strategic
trends. Bull to date silver has generally trended higher in a
nice uptrend, marked above by the long bull support and resistance
lines. Within this secular time frame silver has had three major
uplegs and two major corrections, all marked above.
While there are a lot of concerns
out there that silver isn't leveraging gold's gains to the degree
that history has led us to expect, the situation really isn't
that grim. Silver's bull market has really only been running
for less than three years, compared to nearly five years for
gold's own bull. In monthly terms silver's bull is 33 months
old compared to 56 months for gold's. Since silver's bull is
much younger, its gains are understandably more modest.
Yet, since March 2003 silver
is up 109% bull to date as of this week. These gains are nontrivial
and have been vastly leveraged by folks speculating in silver
stocks like us as well as silver futures speculators. Even buy-and-hold
investors are thriving in this silver bull. I recommended a couple
major silver stocks as long-term investments to our subscribers
back in 2002 before this silver bull really started running and
one is now up 468% while the other is up 226%. This averages
347% and has leveraged silver by 3.2x so far.
And silver's 109% bull-to-date
returns, while they haven't yet reached their leverage potential
relative to gold based on history, are already slighter greater
than gold's 108% bull-to-date gains. And all this has happened
in a young silver bull market that isn't even two-thirds as old
as gold's yet. I have no doubt whatsoever that silver's gains
will start accelerating as its bull matures and will eventually
far outpace gold's just as we saw a quarter century ago.
Another important strategic
aspect of silver's behavior to consider is its propensity to
surprise on the upside. All three of its major uplegs so far
have broken above its resistance before failing. Indeed with
such widely diverging interim tops the positioning of silver's
bull resistance line is not as solid as its support, but regardless
of where resistance is drawn silver's first upleg shot well above
it. This was the speculative anomaly that I have discussed in
past Tactical
Silver Trends essays.
One thing technically-oriented
speculators tend to do that I don't believe is constructive is
to think horizontally. For example, since silver blasted up to
$8.20 in April 2004 but hadn't yet approached those levels again
as of six weeks ago, last year silver's bull market was doubted
by many who should have known better. By considering extratrend
anomalies as more important than the primary trend, some refused
to believe silver's bull was alive and well until $8.20 was finally
achieved again the Monday after Thanksgiving 2005.
Interestingly the same horizontal
thinking also clouded some gold investors' minds and caused them
to miss out on the dazzling 82% upleg in the HUI gold-stock index
since May 2005. Back in early December I was arguing that the
HUI's own extratrend
anomaly of late 2003 was vastly less technically important
than its rising primary trend. While I received a lot of hostile
feedback on the idea of not giving much weight to anomalies,
I still believe it is most prudent to give priority to center-of-mass
primary trends to make sound trading decisions.
In silver's case its primary
trend has been indisputably rising higher. Its trend channel
that was centered on $5 in 2003 is now centered above $8, 60%
higher. The appropriateness of this particular trend channel
is also easily confirmed in two ways. First, it has run roughly
parallel with silver's 200-day
moving average. These 200dmas filter out daily noise to point
out where a market is truly heading, like an arrow. Second, silver's
bull support line has bounced silver higher every year since
this bull began, it has several major intercepts.
I bring this up to point out
that silver's bull market has really been quite healthy since
2003 despite the claims that it only recently broke back above
its early 2004 spike highs. While silver indeed languished in
much of 2005, its poor performance was really only a tactical
consolidation subtrend within its bullish primary trend. While
unpleasant at the time, such consolidations are not abnormal.
Silver surged initially in
2005 along with gold but soon peaked near $7.59 in early March.
This sharp surge higher was probably driven by gold since silver
investors and speculators are usually primarily gold investors
and speculators. When gold is thriving they buy silver too and
when gold is slumping silver is sold off along with gold. Oil stocks
have a similar dominance over gas
stocks, since gas-stock investors tend to be primarily oil-stock
investors. Gold topped at $446 in March within two days of silver
and silver followed its big brother lower.
From that initial excitement
last year silver slumped into its demoralizing tactical consolidation
subtrend. It ground lower and lower until late August when silver
sentiment had turned almost universally rotten. By the time August
rolled around I was receiving lots of e-mails from subscribers
and readers expressing grave concerns about silver and worrying
that this market would never be allowed to rise by various perceived
manipulators.
But as always, regardless of
the reasons for the despair, it is at these emotional fear-laden
lows that the seeds of powerful rallies are sown. Silver erupted
just after its August lows and started powering higher. By early
October it broke out of its consolidation subtrend and proudly
climbed higher. To really drive home the point that this 2005
consolidation was over, silver briefly retreated in late October
and bounced off its consolidation resistance line, effectively
turning it into support. Resistance becoming support is a telltale
bull-market event.
Other than its modest correction
in December after challenging its bull resistance, silver really
hasn't looked back since. Its powerful late 2005 upleg driving
it to fresh new bull-to-date highs has put the metal back on
investors' radars and sentiment is rapidly growing bullish again.
And, amazingly enough, despite its strong surge in recent months
there are strong technical arguments that this particular silver
upleg could climb higher still.
Notice above how silver tends
to surge above bull resistance when each individual upleg matures.
The silver market is so tiny, relative to the capital that can
get interested in it rapidly when it is thriving, that silver
can be bid well above resistance. In early 2004 silver had already
hit resistance at $6.50 on a spectacular initial upleg and instead
of retreating to support it sparked additional buying that quickly
blasted it up another 25% in short order. With current resistance
at $8.75 today, a similar episode now would project an $11ish
top for this upleg if speculators indeed grow excited again.
Another measure of uplegs is
the degree to which they stretch above their anchoring 200-day
moving averages. Relative Silver expresses silver as a multiple
of its 200dma. This rSilver metric hit 1.448x in early 2004's
upleg one and 1.198x in late 2004's upleg two. If we average
these two relative extremes it yields a potential silver target
for today's upleg three of 1.323x silver's 200dma. This would
place the next probable interim silver top just under $10. Either
way there is room to run yet based on bull-to-date precedent.
While I want to discuss relative
silver more after the following chart, there is one more crucial
strategic point to glean above. If you examine silver's two major
bull-to-date corrections, you will note that they are blisteringly
fast and steep. Silver is so hyper-volatile that what passes
for a correction in its world would be considered a full-on crash
in virtually any other market. Once silver reaches an interim
top and speculators temporarily abandon it, it tends to plunge
like a millstone crushing anyone in its path.
This tendency of silver is
extremely important for speculators to protect themselves from.
It is not wise to add new leveraged long positions after silver
is already above its resistance, like today. Once silver's inevitable
post-upleg correction starts, the metal can plummet viciously
in a matter of a couple days with little or no warning. So please
respect silver's extreme volatility and realize it is a double-edged
sword which cuts deeply to the downside. Fight the temptation
to layer in new leveraged longs when it is above its bull resistance!
Back to Relative Silver, we
can zoom in on just 2005 and the tactical trends that have dominated
silver over the past year become much more readily apparent.
This chart also shows the current Relative Silver trading range
that we have been using until more uplegs are complete to generate
more reference data. Silver has generally been an awesome long,
the time to buy, when it trades under 0.99x its 200dma and our
neutral zone on top remains set at 1.25x its 200dma.
The demoralizing tactical consolidation
subtrend of much of 2005, silver's breakout from its chains in
early October, and its bounce turning tactical resistance into
support in late October are much clearer at this scale. And as
the red rSilver line shows, until the last couple months silver
hadn't been able to stretch more than 13% or so above its 200dma
all year. As silver finally started surging in the last couple
months though rSilver shot as high as 1.23x in early December.
Despite the fact that rSilver
is fast approaching its neutral line at 1.25x, this is not necessarily
a cause for concern for investors and speculators with existing
silver-related longs. Due to silver's strong tendency to shadow
gold, the preliminary nature of this arbitrary 1.25x level, and
prudent bull-market trading strategies silver investors probably
don't need to fear silver suddenly crashing after it moves 25%
above its 200dma.
As I have been discussing recently,
the gold markets have been radically changing. Gold is transitioning
into Stage
Two of its bull market where it moves independently of the
US dollar on growing global investment demand. As investors drive
up gold prices globally, they are breaking
out above immensely psychologically important levels worldwide
that are enticing in new investors in droves. This is creating
a virtuous circle where rising gold prices attract in more capital
which pushes prices higher and brings in even more capital.
Since silver tends to mirror
gold by rising when it is strong and falling when it is weak,
today's silver upleg really has the potential to persist for
as long as gold's does. And with gold now over $500 in the States
as well as other major milestones worldwide for the first time
in decades, this first gold upleg of Stage Two could really surprise
us to the upside. I would not want to bet against silver before
gold enters its next major correction.
And with only two completed
uplegs for reference, our arbitrary rSilver topping level of
1.25x does not have a lot of precedent under it. The first upleg
topped way above this at rSilver 1.448x while the second was
far more anemic at 1.198x. As mentioned above these average out
to 1.323x but their standard deviation is huge since the range
between them is so great. Tools like rSilver must evolve to conform
to an individual bull market as it unfolds. The top of today's
upleg three, wherever it materializes in relative terms, will
help us calibrate a better rSilver neutral zone going forward.
It'll probably have to be revised up.
Finally, regardless of technical
tools suggesting silver becoming overbought speculators must
remember that bull markets have a far higher probability of surprising
to the upside than the downside. Selling long silver-stock positions
outright at the first hint of silver challenging its resistance
risks missing any spike higher on increased speculative demand.
I continue to think traders are better off just tightening their
trailing stops as markets grow overbought and letting positions
slide back down into these stops when the corrections start.
Ratcheting up trailing stops
provides us the best of all worlds. It removes the intense greed
and fear that cloud decisions to sell outright. It keeps us silver-stock
investors in our stocks until the last possible moment granting
us the most exposure possible to one of the spectacular upside
breakouts that is so typical of silver. And once silver does
slide, which happens fast, these silver-stock positions are automatically
sold by computer when the stops are hit so no human intervention
is required.
Please realize that all these
strategies are for existing silver-stock positions. Once again
it is probably not wise to buy new silver-stock positions today
with silver above its long-term resistance line again. When a
market is exciting is not the time to buy, instead buying should
be done when it is dull like last August. If you want to add
any new silver-stock positions at all you will have a far higher
probability of success if you wait until silver once again corrects
back down to its 200dma sometime in the coming year before pulling
the trigger.
At Zeal we have long preached
only layering in positions when prices are low relative to their
200dmas. Of the four pure silver stocks we currently own in our
Zeal Intelligence newsletter portfolio, which were purchased
between April and early October before silver heated up, their
average unrealized gains as of this week were 34%. And silver
stocks will almost certainly surge even higher if silver launches
a new spike.
While it may be too late to
prudently add new positions in this particular silver upleg,
there will likely be many more silver uplegs to come. If you
want to receive cutting-edge silver-stock research and recommendations
in the future when prices are relatively low and odds of winning
are high, please
subscribe to our acclaimed monthly
newsletter today. We are already looking forward to the next
silver upleg and are researching the best companies to buy when
the next interim silver lows arrive.
The bottom line is silver is
really looking fantastic technically. Its new bull-to-date highs
this week confirm that its young secular bull is alive and well
despite last year's naysayers. While silver's gains haven't leveraged
gold's yet, they almost certainly will in the years to come yielding
vast riches for prudent silver investors. Silver still has the
potential to ultimately witness the biggest gains out of all
the major commodities.
And while silver is above its
resistance now, today's upleg certainly has the potential to
surge higher still especially if gold's own upleg persists. While
it's probably not wise to add new positions today with silver
stretched above its 200dma, existing positions can still thrive
if silver continues higher in a typical bull-market upside surprise.
Adam Hamilton, CPA
January 6, 2006
Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!
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