Silver has cratered in 2013, spawning a sentiment wasteland of extreme bearishness. Yet peak despair is the very best time to buy low. Silver prices have converged on multiple major secular support zones, an exceedingly bullish technical launchpad.
The white metal is also very cheap relative to gold, which is its primary driver. All this is setting up silver and the stocks of its miners for a fantastic new upleg in 2014.
I know that is hard to believe this week, with the Fed’s surprise QE3 tapering hammering the precious metals. Literally all year long, the tapering hysteria has sparked numerous selloffs in gold and silver. And this week the actual taper is pounding silver down to retest its deep late-June low. Schizophrenic futures traders believe not only are QE3’s inflationary debt monetizations bearish for silver, but so is the end of them!
But despite all the epic silver hate out there, it has actually shown tremendous relative strength in 2013. Silver is down 34.6% year-to-date, but gold is down 27.1%. Gold is silver’s dominant driver, as traders will only aggressively buy silver when gold is rallying. Since silver’s secular bull was born over a dozen years ago, its price has had a daily correlation r-square with gold’s of 92.2%. That is staggeringly high.
Over 92% of all silver’s daily price action over the past dozen years is directly mathematically explainable by gold’s own! Silver is effectively a leveraged gold play, as it tends to amplify the underlying moves in its driver. This leverage often exceeds 2 to 1, so to see silver down only 1.3x as much as gold in this extremely anomalous year is truly an incredible show of relative strength. Silver ETF holdings confirm this.
From a pure fundamental supply-and-demand perspective, gold’s entire plunge this year was the result of American stock traders dumping its dominant ETF GLD. GLD’s holdings have plummeted 39.8% this year, an astounding and unsustainable anomaly. Yet despite silver getting sucked into gold’s maelstrom, its flagship SLV silver ETF has seen its holdings rise 0.5% year-to-date! Even this year, silver buyers remain.
And if this much investor interest in silver endures through a hellstorm like 2013, imagine how fast silver investment demand will soar when gold’s overdue mean-reversion upleg gets underway. It would not surprise me one bit if silver proves to be 2014’s best-performing commodity, and totally trounces the general stock markets. Its radically-undervalued price offers a fantastic contrarian buying opportunity today.
Since investors and speculators flood into silver when gold is decisively rallying and then flee when gold decisively sells off, silver acts like a gold sentiment gauge. It soars during major gold uplegs, greatly outpacing the yellow metal’s gains before they climax. But this leverage is a double-edged sword, as silver plunges during major gold corrections. Thus silver prices end up effectively oscillating around gold’s.
This first chart illustrates this critical relationship over the past 9 years. With silver superimposed over gold, it is easy to see how silver falls behind gold when precious metals are out of favor and then surges far ahead when investors start liking them again. The biggest uplegs of silver’s secular bull, which are gargantuan, are all born in despairing times like today when the precious metals are universally scorned.
Back in mid-2005, silver had fallen way behind gold and was absolutely despised. Yet out of that very despair a massive 124% parabolic upleg was born. Silver corrected far more sharply than gold after that (1.6x), again falling behind its primary driver. Yet that marked the bottom before it powered 114% higher over the next couple years. And that took us to the ultimate anomaly, 2008’s once-in-a-century stock panic.
Between March and November 2008, silver plummeted a gut-wrenching 57%! Like this year, silver was sucked into gold’s panic selling. And silver leveraged gold’s downside by 2.3x, which is why this year’s 1.3x seems so mild. Gold and silver were both loathed and left for dead. If they couldn’t rally during a full-blown stock panic when fear hit its greatest extremes we’ll see in our lifetimes, when could they ever rally?
That vexing question certainly parallels 2013’s. If gold and silver can’t rally during the biggest inflationary event in world history, the Fed’s massive QE3 campaign, when can they ever rally? Surely they must be dead, their secular bulls shattered. That’s exactly what the vast majority of investors and speculators assumed in late 2008, and they were dead wrong. New uplegs are born out of extreme bearishness!
And indeed silver soon started powering higher out of those brutal stock-panic lows, gradually regaining ground relative to gold. And in late 2010 and early 2011 as gold kept on steadily climbing, silver soared to massively leverage gold’s upleg. This monstrous upleg for the white metal went parabolic to ultimately catapult it to epic 443% gains! This was over a multi-year span where the S&P 500 merely climbed 81%.
Whenever the silver price falls way behind gold’s when the precious metals are deeply out of favor, mighty new uplegs are born. The last time silver sentiment was as hyper-bearish as it is today in 2008, silver plunged 25% that year. 2013’s 35% plunge so far is roughly in line with that. But in 2009, silver rebounded with a massive 52% mean-reversion upleg! 2014’s silver’s gains should at least be in line with that.
Hogwash you say? There’s no way silver can surge 50%+ in 2014? It’s actually a lowballed very conservative target. Silver’s average mean-reversion uplegs out of major lows when it lags well behind gold have been 227% over 1.6 years. And if you want to strip out that epic post-stock-panic one, despite the fact 2013 was unarguably a panic-grade year for the precious metals, they still run 119% over 1.2 years.
So seeing silver up 50% over the next year is nothing for the white metal, it would actually be the worst upleg out of extreme lows of its entire secular bull! In the exact 12 months after its stock-panic low, silver blasted 108% higher. And silver’s technicals support the case for an imminent massive upleg too. Silver’s disastrous 2013 has brought its major secular support line back into play today, as seen in this chart.
Over the past decade or so, silver has enjoyed strong secular support at the same line it has fallen to twice this year. Out of those past support approaches, massive silver uplegs were born that ultimately went parabolic. Interestingly those past silver uplegs crested at or above a secular resistance line that is way up at $39 today. And it is rising at a slope of $3+ annually, so a year from now it will be up near $42.
From this week’s dismal Fed-taper-hysteria-driven levels, silver would have to surge 112% over the next year to hit its secular resistance at $42. This is right in line with its more modest pre-stock-panic uplegs that again averaged 119% gains over 1.2 years. Technically silver has absolutely clear sailing until it blasts way up around $40. And what investor wouldn’t be happy with a quick double? Silver is due for it.
Out of massive corrections, out of extreme bearishness and despair, massive uplegs are born. And silver is technically right at the zone where its past parabolic uplegs began, its secular technical launchpad. And just like today, the only traders who rode the great majority of those uplegs were the hardened contrarians. It is very challenging to buy low when others are afraid, to fight the crowd and risk ridicule.
But that’s the way fortunes are won. The timid lack the mettle to buy low, so they wait until after silver has already run then buy high. They may enjoy modest gains for a spell by buying near tops, but these are quickly smashed in the inevitable subsequent correction. This is exactly what general-stock investors are doing this year, buying into an expensive euphoric topping that is destined to roll over and slaughter them.
The secret for investing success is so simple, buy low then sell high. What is more likely low today, the S&P 500 that is up 27% year-to-date or silver that is down 35%? And the financial markets have a powerful tendency to mean revert after exceptional years, so the trends that dominated 2013 are likely to be the exact opposite in 2014. Silver truly offers an amazing buying opportunity for contrarians today.
And it’s not just silver’s exaggerated upleg-and-correction cycles and its secular-support approach that make it look so wildly bullish in this coming year. Silver also happens to be very cheap relative to gold, its primary driver. So as gold recovers in 2014 as 2013’s epic and unsustainable ETF selling pressure dries up and then reverses, silver is perfectly positioned to leverage gold’s gains even more than usual.
The tight relationship between silver prices and gold is easiest to understand through the Silver/Gold Ratio. It simply divides the daily silver price by the daily gold price and charts the result over time. But since silver’s price is so low relative to gold, the true SGR yields a tiny hard-to-comprehend decimal. So I prefer to use an inverted Gold/Silver Ratio in my research, which shows whole numbers easier to process.
This week the SGR was running near 62x, an ounce of silver traded at about 1/62nd the price of an ounce of gold. This is actually pretty low by several standards, and the SGR is now just under multiple major support zones. When any price falls sharply to major new lows like silver has this year, the more support zones that price converges on the more powerful the case that the bottom is in. Silver’s is ironclad.
Let’s start with post-panic support, which is up near 59x today. For the entire post-stock-panic period before this year’s extreme precious-metals anomaly, that rising SGR support line has held. And on average in this post-stock-panic era, the SGR has run at 57.5x. Exclude this year’s craziness, and it rises to 56.9x. Either way, silver at 62x is well underpriced relative to gold compared to its post-panic precedent.
Over the past decade or so, the SGR has spent the lion’s share of its time trading in a horizontal secular range between 60x support and 45x resistance. That is shaded light blue in this chart. Silver tends to fall down near or under support when it is out of favor, but then surge up to or over resistance when it subsequently regains investors’ favor. So it has lots of technical room to leverage gold’s recovery in 2014.
Silver’s pre-stock-panic average SGR was 54.9x, and there is actually a strong pre-panic support line that extends up near 36x today. Seeing silver outperform gold so dramatically is admittedly a stretch goal that would require it to actually grow popular again for the first time since early 2011, but it isn’t outside the realm of possibility. All these SGR technicals yield silver price targets much higher than today’s levels.
At worst, silver really ought to climb back up to the top of its secular trading range during its next upleg. That would put the SGR up near resistance of 45x. At $1200 gold, that would equate to a silver price nearing $27. That represents a nontrivial 35% rally from here. But silver isn’t going to move until gold leads the way, and thankfully gold is due for a massive mean-reversion upleg in 2014. Just like in 2009.
After 2008’s gold carnage which was the only episode of this metal’s entire secular bull comparable to its stunning 2013 selling anomaly, gold blasted 24% higher in 2009. But since 2013’s selloff was far more extreme, the Fed’s inflation baked in is vastly higher today, and the wildly-overextended stock markets are due to roll over imminently, I wouldn’t be surprised at all to see gold enjoy even bigger gains in 2014.
But let’s use that 24% precedent of 2009, gold’s last mean-reversion recovery upleg year. Similar gains in 2014 would drive gold back up near $1500. At a 45x secular-trading-range resistance SGR and $1500 gold, we’d be looking at a silver price above $33. That is 68% above today’s levels, easily exceeding the modest 50% silver-gains target in 2014. And if silver actually grows popular again, all bets are off.
Back in early 2011 when silver was last popular, the SGR soared above 32x as silver went parabolic! That was way above its pre-panic support line. Soon after 2008’s stock panic in early 2009, I published an essay predicting the SGR would again exceed pre-panic levels in coming years. Even though I was absolutely right to be bullish in such despair, the contrarian case for silver then was ridiculed as it is today.
The pre-panic SGR support line is rising at about 3 points per year, so it should be up near 33x a year from now. At a $1500 gold price, silver winning enough popularity to regain that SGR level would blast it up above $45. That is 129% above this week’s levels, and roughly in line with silver’s weaker past parabolic uplegs. You can certainly plug in your own gold and SGR levels to see where silver ought to be trading.
But as long as you assume precious metals are bottoming, that 2013 was simply a brutal ETF-liquidation-driven anomaly instead of a new normal, silver prices are destined to head far higher than today’s ugly levels. This metal has been driven down into multiple major technical support zones, and it is going to rally huge out of here unless gold would somehow plunge and defy today’s extreme selling exhaustion.
Given silver’s perfect track record of soaring both absolutely and relative to gold after falling well behind the yellow metal, every investor and speculator ought to have substantial silver exposure in 2014. That can be through physical bullion or the stocks of silver’s best miners. Silver-stock levels are far worse than silver’s, the miners beaten down to fundamentally-absurd levels as if silver was a fraction of today’s prices.
The opportunities in silver stocks today are among the best I’ve ever seen, most are due to at least quadruple if silver indeed rallies 50%+ in 2014. So silver stocks are a fantastic destination for investors looking to reposition for the coming year. At Zeal we’ve long researched commodities stocks, and rather fortuitously we just finished our latest 3-month deep-research project digging into the silver miners.
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The bottom line is silver has been pounded down to a major technical launchpad. It is now trading near multiple secular support zones, including relative to its primary driver gold. After falling behind gold to hit similar levels in the past, silver soon exploded higher in massive parabolic uplegs. And odds are high another one is due in 2014, with silver greatly leveraging gold’s gains in its mean-reversion recovery upleg.
Silver surging 50% next year isn’t even a stretch, and a full-on doubling in 2014 is more in line with past precedent out of similar despair-laden lows. So all investors and speculators should deploy some capital in silver and elite silver stocks today to ride these coming gains. It’s never easy buying low when a sector is deeply out of favor, but that’s when prices are cheapest which ultimately leads to the biggest wins.
Adam Hamilton, CPA
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