 Silver's New Upleg
Adam Hamilton
Archives
Aug 7, 2004
It has been somewhat of an anticlimactic summer in the precious-metals
arena. Following sharp corrections and/or long consolidations,
gold, silver, and
the HUI
unhedged PM-stock index have all traded largely sideways in recent
months.
Early on during these consolidations,
in the first couple months of 2004, PM speculators remained very
gung ho and excited about the near-term prospects for their PM
speculations. As this year marched on however, the lack of thrilling
breakouts to the upside and the increasing negativity began to
weigh on psyches.
Today the metals markets seem
to be racked with ambivalence at best and festering pessimism
at worst. The intellectual justification for this rampant negativity
runs the gamut from election-year manipulation theories to the
perceived risk of PM stocks cratering along with overvalued general
stocks. Whatever the specific reasons advanced though, the radical
shift in prevailing metals psychology throughout 2004 has been
quite dramatic.
The best proxy for the lackluster
PM sentiment is certainly the sideways drifting HUI. Since the
final weeks of its sharp correction in late April, this flagship
index has drifted rather aimlessly between about 170 and 200
for over three months now. As a homogenous herd PM speculators
have vacillated all summer, neither willing to ante up fresh
capital to plow into PM stocks nor willing to pull their existing
capital and crash the index.
As always the best way to dispel
this persistent funk is to witness rising prices, the early evidence
of enormously profitable major new uplegs approaching. Gold and
the HUI were both up modestly since their early May lows, achieving
early July upleg-to-date gains of 8.8% and 19.4% respectively.
Unfortunately the dollar surge in July pared these gains considerably,
knocking them back to 3.2% and 3.7% late in the month and rekindling
popular fears of an impending PM crisis. Is the end of metals
as we know them upon us?
Galloping to the rescue there
is a bright ray of sunshine piercing through all the precious-metals
gloom and doom these days. Largely overshadowed by the perpetual
tussle between gold and its arch nemesis the dollar, silver has
been relentlessly advancing under the radar. Just this week silver
was up a fantastic 21.8% from its early May correction lows!
This week I would like to discuss
this strong early recovery in silver prices and its important
implications for the metals world in general. Silver's summer
price signature appears to be that of the early months of a major
new upleg. If this interpretation proves correct in the months
ahead, then silver is leading the way and gold and the PM stocks
will certainly follow sooner or later here. Silver's new upleg
is the great news that PM speculators have been increasingly
desperately seeking!
The technical case for this
new silver upleg is readily apparent in the price charts. This
week we are examining a couple silver charts, a strategic one
detailing the past year or so and a more tactical one zooming
into the last six months. The picture that silver is painting
is looking better with each passing day and it is a shame that
the dollar-rally-induced gold weakness in recent weeks has overshadowed
these important silver developments.
Silver has certainly lived
up to its volatile reputation and has granted speculators one
wild ride in the last year or so. From hovering under $5 to powering
above $8 to collapsing under $6 to once again challenging $7
today, it has really been a fascinating year to watch long-slumbering
silver starting to wake up and flex its muscles.
The impressive 72% trading
range captured in this chart may seem extreme, but in light of
silver's explosive history it is really quite tame. When silver
really gets cracking, it has the potential to soar by hundreds
of percent a year and dwarf the moves highlighted above. Silver
is almost certainly the most volatile popularly-traded commodity
in existence over the long-term and it is very exciting to see
it once again spinning up and getting ready for action.
To understand today's dreary
psychological scene, we really have to consider the entire past
year's silver action in context. Last summer silver was extraordinarily
dull and
uninspiring. Between early 2002 and autumn 2003 silver seemed
hopelessly mired in an oppressive trading range bouncing between
roughly $4.25 to $5.25. Silver bulls were certainly out there,
but they were a very rare, and much maligned, breed. I think
even tax collectors may have been more popular than silver bulls
back then!
Then, seemingly out of nowhere
as Q3 2003 began, silver kissed its 200-day moving average goodbye
and took a decisive turn northward. For the next six months or
so silver seemed nigh unstoppable, clawing its way higher month
after month and more or less continuously hitting new bull-to-date
highs. As this first major upleg gloriously announced the new
bull market in silver to the world, naturally speculators grew
very excited about silver's prospects. Those were darned fun
months!
Silver is an extremely small
market in the grand scheme of things, an infinitesimal fraction
of stocks and even vastly smaller than gold. It doesn't take
a great deal of capital, relatively speaking, to move silver
quite dramatically. As more capital than usual started chasing
the new upleg in silver, silver prices kept going up and up along
with general sentiment among silver speculators. By the time
silver approached $8 in March most players were convinced that
the fabled $10 level couldn't be far behind.
But the markets have an uncanny
knack for executing a short-term turn-one-eight just as the majority
of speculators are convinced that an existing trend will accelerate
indefinitely. By March the increasing level of silver bullishness
was making me nervous over the short-term since silver was getting
stretched much too far above its major bull-market support at
its 200-day moving average.
On April 1st just before silver
crossed $8 I wrote the following in the April issue of our Zeal Intelligence
newsletter for our subscribers, "Stretched 42% above its
200dma bull-market support, a major correction is due in silver.
It makes no sense to buy silver stocks or physical silver today.
A typical bull-market pullback would drag the metal back down
near its 200dma, and I am sure that silver stocks would be hit
hard in a silver retreat back down under $6."
The red Relative
Silver line above, rSilver, quantifies silver relative to
its 200dma in absolute constant percentage terms over time. In
early January rSilver had exceeded 1.30, silver traded 30%+ above
its 200dma, and the charging metal began retreating. It was able
to hold the line and recover though, shooting up to 45%+ above
its 200dma before finally giving up its ghost.
To put this extreme degree
of overextension into perspective, gold tends to retreat into
a correction once it stretches only 15% above its own 200dma,
so silver's 1.45 rSilver reading at its latest interim top was
really extraordinary and quite ominous from a short-term perspective.
All of the financial markets
inevitably flow and ebb, advancing and retreating over time.
They usually take two steps forward within their primary trend
before taking one step back in a countertrend move. Graphically
these uplegs and corrections become evident as a bull market
advances far above and then retreats back down to its primary
bull-market support at its 200dma. The red rSilver line above
traces these very typical tactical sentiment waves oscillating
within silver's primary trend.
These short-term swings are
necessary to bleed off temporary speculative excesses that result
when too great a percentage of traders pile on to one side of
a trade, long or short. Silver was short-term overbought early
this spring and it needed to correct, period. And correct it
did, with something of a wicked vengeance.
Silver plummeted like a millstone
in April, ultimately plunging by a gut-wrenching 32.8% by early
May. Ouch. Unlike the HUI, which took a long
time to consolidate back down towards its own 200dma, silver
decided to take the express elevator down and correct viciously
fast. This correction, while very painful at the time for long
silver speculators, accomplished a couple key things.
First, when silver was topping
in early April bullish sentiment was just too crazy over the
short term. There were too many longs and there was too much
greed to be sustainable. Silver's sharp correction deftly obliterated
both the excessive longs and the greedy speculative fury that
was swirling around silver. The great sentiment pendulum swung
back from greed through neutrality and slammed into naked fear
by the time the early May bounce occurred.
Second, silver retreating back
down to its 200dma cleared the way for its next major upleg.
All primary bull markets retreat back to their 200dma support
periodically, and silver had not made the visit for almost seven
months. By descending back down to get reacquainted with its
200dma, silver once again flashed the technical green light alerting
technicians that it was reloading and that its next major upleg
could launch at anytime.
Technical go signals aside,
the long speculators who got caught in silver's sharp correction
were understandably extremely bitter and negative after the dust
settled. They promulgated all kinds of manipulation theories
explaining why various shady groups had set out to target them
directly. Even a century ago Jesse
Livermore commented extensively on the natural human tendency
of speculators to want to blame anyone but themselves for their
own losses.
Looking back though, there
was really no need for manipulation theories since silver had
been unarguably overbought over the short-term and just needed
to correct. Periodic corrections within bull markets are inevitable
and no big deal, they will happen and we just have to deal with
them. Manipulations do undoubtedly happen often in the financial
markets, but the Occam's Razor principle demands that speculators
always consider the simplest possible explanation for a given
price movement before adding complications like malicious unseen
parties directly gunning for them.
Regardless of whether the silver
correction's cause was natural or artificial, the lingering fear
from this steep slide coupled with the grumbling over losses
set a very negative precious-metals mood heading into the summer.
Gold and the HUI had been consolidating too but I think the silver
plunge was the straw that broke the camel's back in sentiment
terms. Once silver plummeted, the perceived popular allure of
the whole precious-metals sector shrunk dramatically.
I believe this negative sentiment
carried through most of the summer and is the primary reason
why speculators remain unwilling to buy PM stocks despite the
new uptrends in gold and silver alike. This strikes me as really
ironic.
The only reason to buy PM stocks
is because one expects gold and silver prices to rise. Well,
gold and silver prices are rising since their expected
corrections ran their courses earlier this year! As gold
and silver prices rise, PM miners' profits grow dramatically
rendering their stocks much more valuable. Yet, today PM speculators
remain stubbornly reluctant to commit capital and the HUI drifts
aimlessly in some sort of surreal market purgatory.
While you couldn't tell by
talking to an average depressed PM speculator or watching the
HUI's excruciating lethargy, gold and especially silver are actually
looking up since their spring weakness. As the trendlines above
and below illustrate, silver is carving a definite uptrend since
its May lows. I suspect that this uptrend will grow into a full-blown
upleg in the coming months and silver prices will catapult much
higher.
When we zoom into the last
six months or so the precision and strength of this new silver
upleg becomes very apparent. Why would any speculator owning
silver stocks want to sell them when silver is marching higher?
Provocatively, there are a handful of elite unhedged silver miners
that are actually trading lower now than they were in early May!
This rare and unsustainable disconnect is providing stellar opportunities
for fearless contrarian speculators.
An uptrend, or a longer upleg,
is simply defined technically by a series of higher lows and
higher highs. The blue silver line rendered above fits these
requirements perfectly. Each subsequent interim low that silver
carves near its support line seems to be higher while each subsequent
interim high exceeds its immediate predecessor as well. This
beautiful chart, an unmistakable uptrend, looks exactly like
the early months of a major new bull-market upleg.
Even in relative terms silver's
advance in recent months is textbook perfect. The red rSilver
line shows silver first flirting with its 200dma in May and June
and then pulling away from it and heading higher in July. I consider
any rSilver level under
1.03 to be a strong buy signal and we have been blessed to
have this coveted green light to buy silver all summer.
As long as silver remains in
a primary bull market, as it ought to based on growing world
demand and flat supplies, silver should continue running higher
until it stretches at least 30% above its 200dma. Based on today's
200dma, an rSilver 1.30 neutral zone won't occur until silver
trades above $8 again, right near its early April highs. And
as silver's 200dma rises in the months ahead, the absolute silver
price 30% above it will continue to rise higher as well, so our
neutral target will gradually migrate upward.
In addition to its crystal-clear
uptrend, there are other bullish technical developments on this
chart as well. Silver's white 50dma is about to cross back over
its black 200dma to the upside. A 50/200 moving average cross
is a big deal to a lot of silver futures traders and they will
probably consider it a bullish omen. Silver buying could accelerate
considerably once silver's 50dma meanders decisively above its
200dma in the weeks ahead.
And since silver is such a
tiny market, even a relatively small amount of buying will push
its price up and entice in even more buying, creating a virtuous
circle. Silver is also nowhere near its upper Bollinger Band
at the moment, its top yellow line, so it can't be considered
technically overbought even over the ultra-short-term. Yes, it
certainly could retreat back to its lower support line around
$6 and bounce anytime, but it could just as easily power higher
until its hits that upper Bollinger Band two-and-a-half standard
deviations above its 50dma before regrouping.
Any way you want to slice it,
silver is carving a gorgeous new uptrend! And for a lot of fundamental
and technical reasons I suspect that this particular uptrend
will ultimately blossom into the second full-blown bull-market
upleg in silver. If the markets prove me right in the months
ahead, then silver investors and speculators alike will earn
excellent returns in the metal itself and in all of its related
speculations including silver-mining stocks along with futures
options and equity options.
If you are interested in silver
and how to trade this new upleg, you may wish to check out the
hot-off-the-presses August issue of our acclaimed monthly Zeal Intelligence
newsletter just published. My partners and I are actively playing
and constantly evaluating and gaming this increasingly powerful
new uptrend in silver.
For long-term silver investors,
I outlined a couple brilliant new strategies designed by legendary
metals analyst Franklin
Sanders for trading bullion with the goal of at least doubling
the bull-market returns obtainable on a buy-and-hold physical
silver investment. For very little risk it is possible to strategically
trade silver bullion during a silver bull and come out with far
more silver at the end than from conventional buying and holding.
These investment ideas are very powerful and innovative and every
metals investor needs to be aware of them.
For silver speculators I recommended
a new buy in one of the world's best silver miners. This elite
unhedged silver company has been grinding lower during the silver
uptrend of recent months creating an unsustainable and potentially
quite profitable divergence. Either the stock is right and silver
fails and plummets or silver is right and the stock will have
to soar in the months ahead to catch up. Obviously I think silver
is right this time and this stock will rebound with a vengeance
once the markets realize this. When silver is up but one of the
best pure silver plays on the planet is down, it seems negligent
not to seize this incredible opportunity!
As always, brand new e-mail
PDF edition subscribers will receive a complimentary copy of
this current August Zeal Intelligence as our way of saying thanks
for honoring us with your business. Your paid subscription will
start with next month's new issue. I am very grateful for your
support and I could not analyze and write about the markets without
it. Please consider subscribing
today!
So, as we plunge into this
last full month of summer, please try not to get caught up in
the overwhelming negativity permeating precious-metals land.
Sure, PM stocks have largely traded sideways and the dollar's
strength in recent weeks has hurt gold a little. But regardless
of these short-term events, gold remains in a modest new uptrend
as it carves higher lows and higher highs.
Far more impressive is silver's
fantastic performance this summer. Just a year ago if silver
had done this people would be yelling about it from the rooftops,
but after silver's sharp correction earlier this year sentiment
just remains unnaturally dreary and depressed. This won't last
forever though. The higher the silver price moves, the more the
scales of fear will fall from speculators' eyes and the more
enthusiastic they will grow in bidding up its price.
Silver's new upleg sure looks
like it is already underway and odds are it will prove to be
one of the key catalysts that leads gold and the HUI way higher
in their own next major uplegs. Silver's strength is providing
tons of evidence suggesting that the precious-metals bulls are
far from dead but are on the very verge of powering higher yet
again.
August 6, 2004
Adam Hamilton, CPA
email:
zelotes@zealllc.com
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