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Title : A word on silver (from IKN528)
link : A word on silver (from IKN528)

A word on silver (from IKN528)

This piece discussing the potential for a silver breakout and what I planned to do before and after the event appeared in The IKN Weekly edition of two weekends ago, IKN528 dated July 7th, 2019. Another example of the difference between the blog and the weekly (where I actually get some work done), I'm publishing it on the open blog because from where I'm sitting it's really hard to get a balanced view on this most contentious of metals, all the "silver sucks" versus "silver to the moon" shouting just gets on my nerves. Charts as appeared nine days ago, one company name removed.

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A word on silver

A lot of people are now pointing to silver as the place to be, with newsletter writers, columnists and mining radio show hosts all banging the table hard on the inevitable rise in silver that will make us all rich, so let’s have a re-cap of the IKN Weekly coverage on the metal this year. In the fundies note IKN513 dated March 24^th entitled, “Regarding the Price of Silver in 2019” I laid out my own case for an improved price of silver this year. Based on fundamentals (instead of hope), the piece examined supply and demand characteristics of silver and came to its conclusion, repeated here:

“There are never any guarantees, but on balance and after looking at the sector from several different angles this week I’m fairly certain that the bottom in the price of silver is in and downside risk is minimal. This isn’t due to lack of demand from its main customers as industries of all sorts, electronics makers, solar panel makers and people who like to wear shiny things on their fingers, ears and necks are buying the metal as per normal. The demand slump comes from the investment community, silver is now totally out of fashion and being puked back into the market at a rate only seen at the height of the financial crisis, ten years ago. That’s the contrarian signal I look for.”

That fundies note got a small update in IKN516 dated April 14^th, in which the argument was repeated (and noted the potential for the price of silver to move more quickly than I’d thought). With that in mind, here’s the 2019 YTD comparative chart for silver (SLV proxy) compared to gold (GLD):

 

So let’s check on the IKN513 conclusion paragraph:

• The bottom of the silver price was NOT in at the time, we had to wait for late May. Also in IKN517 I posited that silver may start its rebound earlier than I’d imagined in the first piece, so that was wrong, too.
• Then again, the line about “downside risk minimal” seems to have held. Yes we dropped some more, no the drop didn’t last and we’re now back at U$15/oz.
• If silver stackers are coming back into fashion (and they are getting the pep talk from all sides of the precious metals fanclub), as noted in the main body of IKN513 that would probably be enough to tip the balance back to bullish.

It’s hardly an inspiring price performance (and the reason I set against gold is to show silverbugs what they’ve been missing), but flatline after three months isn’t a disaster either and there are signs silver is waking up. However, there’s also this:

The gold/silver ratio for the past five years has been one-way traffic, with just the period in early 2016 to alleviate the pain for longs. There’s a lot of talk about that early 2016 period today, the recent gold move being compared to what we saw back then and the way silver may have taken its time to get its act together, but when it did shot like a rocket. And that’s fair enough, if the pattern does repeat anyone buying today will look much smarter than me. However, let’s recall that the move in gold in the first six months of 2016 was sharper than the one we’ve seen so far today, from U$1,085/oz to U$1,355/oz (feel free to argue the toss about intraday reads, I’m going with the London PM fix data), which is give-or-take +25%. In the same time period, silver moved from U$13.80/oz to U$20.30/oz, roughly 47%. Yes, that’s big beta to gold and probably why silver’s speculative attraction is getting column inches, but we need to compare it to the current move in gold, which can be spotted in other prices but I’m going to go with the global general U$1,300/oz to U$1,400/oz, a 7.7% improvement. Even if you pimp the bottom and top prices of the current gold move, it’s difficult to get over 10% and that’s nowhere near the power of the turn we saw in early 2016…not yet at least.

Yes, silver is now more tempting as a speculative opportunity but that’s what it is, no more and no less (and I trust you hold gold bullion for different reasons than mere speculation). The GSR is very high at 93X, but the same people telling you it cannot go any higher are the ones in March and April telling you that 85X was the top as well (and let us be crystal clear about this, I was one of those and even if I allowed myself time for the turn to happen and claim some mitigation, I was wrong). Therefore and for the time being, I will stick with (name removed) as my sole direct silver exposure and stick with mostly gold until there is a definite change in the GSR trend. It is not our friend and fortunes have been lost by people watching black coming up eight times in a row on a roulette wheel and assuming the odds were 9/1 in their favour on the next spin (88.9%). No, sorry, they were 48.64% that you’d win and 51.36% that you’d lose, the same as always. Predicting nine trading days in a row is very different from watching eight and predicting one.

However, both you and I should be ready with our best trade ideas if silver does make that turn. At the very top of the GSR we get a sharp waterfall drop that breaks through trends (note the 50dma and 200dma lines on the above chart, they’ll do as a start) and when that happens, the silver stocks will blast off before you can get on the cheapest prices (better put, “before I can get on the cheapest prices”). However, that should not deter a new long position in silver as this chart featuring a few silver names (from the top of my head, no cute cherrypicking on display) helps to illustrate.

Bottom line: I will not try to catch this falling silver ratio knife, but I am ready with trade ideas if the turn materializes. Until then, gold is preferred at The IKN Weekly (except XXX).

Thus Article A word on silver (from IKN528)

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