Major SLV Turning Point: It's All About Wealth Transference!

| About: iShares Silver (SLV)

Here I aim to identify a major turning point in silver. By definition, if correct, then the bears would not have their technical breakdown, while the bulls would avoid their emotional one. Inflation and war, whether financial or military, are the most defining fundamental elements as regards why to own precious metals. The single largest fundamental argument in the world right now, among all those that exist for buying precious metals, is, very simply, the will (known as "currency war") to transfer wealth from other countries to one's own.

Monetary Policy

Bernanke is not so dumb as to believe that "QE" can affect the unemployment rate. However, the media and investors are certainly silly enough to call him an idiot for believing so. But he doesn't.

It's all about wealth transference!

The Bank of Japan (BoJ) will introduce "quantitative and qualitative monetary easing," increasing purchases of Japanese government bonds to "about 50 trillion Yen" ($530 billion) per year, sucking up all maturities, as opposed to being limited to those that are three-year-from-maturity, as has been the case to-date.

Kyle Bass has quickly pointed out that the Japanese are therefore buying bonds at three-quarters the level of the U.S., while having an economy one-third as large. Meanwhile, British debt has attained to a level of nearly 1.4 TRILLION Pounds (the Brits have doubled their debt since the 2007-2008 crisis). As for the Japanese, their grandiose style was manifested, as always, when it was no longer expected.

I had believed that the Japanese would be the last to print in size, to rationalize the mega-bazooka that they would fire to start writing off debt. They have more than begun, and, as in all wars, their actions have opened the door to retaliation to the retaliation, with everyone in the world blaming the others for the escalation.

Propaganda aside, precious metals come out on top, regardless of the political truth. Looking at silver and gold in Yen clarifies the explosiveness with which the Dollar-denominated precious metals bears are playing. The PMs presently (in Dollars) look the way they did in Yen, for instance, only very recently. Bears, be afraid. Be very afraid. Bernanke is the face of U.S. retaliation.

I write here of the U.S. what I had forecasted of Japan: they will retaliate soon. Bet on it, and don't listen to what central bankers say. I again warn: follow what they do. So, taken together, the Dollar should look worse as we head into the heart of summer. However, this is not just a play on what currency in which to own silver or gold. Not at all. The Dollar reversal will allow Dollar-denominated owners to share in what others in the world have enjoyed, but the windfall gains will come when the marketplace recognizes that the global printing is as unending as it is massive beyond calculation.

Specifically, the catalyst to the windfall gains will be the identification of global QE as the spark to inflation, which is finally building, as economies are not producing what is being consumed. This relatively soon, and compounded but not dependent upon a Dollar reversal. The collapse in the Yen that resulted from the BoJ's stunning monetary policy enhancement is a re-visitation of the low. Meanwhile, the euro reversed on the back of well-established bullish momentum divergences, as that trade became a bit too crowded too fast.

Many did learn to not listen to what the bankers said previously, but, rather, followed the trend of central bankers' actions. So, the Yen's decline from its peak discounted some of this "enhancement," so the new lows will perhaps not be as far away as many might be thinking. The preceding makes the basic point that the bankers take turns outdoing each other, again, to transfer wealth and write off debt. Follow the money. This is a balance sheet story, and not one that is principally trade-related (income statement).

War, What is it Good for, if Not Precious Metals?

What if Korea or the Middle East did become seriously problematic, would the PMs decline because the Dollar is a safe haven? The financial relationships have been breaking down because the Dollar is not rallying, whereas other currencies are merely falling; a grand scale currency war is a new phenomenon.

History shows that the sequence of global decline in the economy at the end of the Long (Kondratieff) Economic Cycle is: financial (2008), economic (2013?), and political/military (2017?). So, I do not believe that problems in Korea or the Middle East will accelerate now. Later, somewhere, definitely.

The central bankers and political planners and leaders are in the same war room. It's about not paying one's accumulated debt. However, currency war is ultimately confronted by military war, and that is just a matter of time, whether it is triggered by one of the major players who can print, or anyone else. The commissioners of global QE are not dumb for their economic designs (managing employment or inflation, etc.); their financial goals are dangerous (restructuring their balance sheets at the expense of those nations that print).

Through the ages, military war though has been used to expropriate property, but printing TRILLIONS of Dollars, Yen, Francs, euro, Renminbi or Pounds, allows one to not pay for what one has already obtained ("fiscal stimulus"). Countries such as Venezuela have used and are attempting other means at their disposal to deal with the currency crisis, but can only make efforts that affect the income statement (trade), not the balance sheet (wealth transference/debt para-repudiation), such as the major players are doing.

The next world war is rooted in the war that has begun in currencies, and the inflation that the latter's mega-money-printing will have created. The currency war allows PM investors to make a lot of money, according to the musical chairs' determination of which currency falls at any given moment (i.e. at this time, they're scoring in Yen). The physical war will allow the PM owners to survive better.

Silver Price Drivers

According to Casey Research, Ted Butler reported last weekend that the Commercial net short position in silver is at the lowest level since last summer. He also made the point that the Commercial traders other than the "Big 8" hold RECORD high long positions, while technical funds maintain a record gross short position, as well as the smallest long position in his memory.

Admittedly, the band was stretched very tight even before this week, but that doesn't make the elastic any less likely to snap and catapult silver to much higher prices. Casey Research also published the graph below, which was produced by Nick Laird: "Days of World Production to Cover Comex Short Positions." It covers the largest 4 and 8 traders of the physically traded commodities on the Comex.

Of the Big 4, silver requires the MOST days of world production to cover existing short contracts on the Comex. Among the Big 8, silver is tied with palladium.

Indeed, much has been made of the fact that short positions are astronomical and that a break above key resistance levels could leave shorts scrambling and fueling the spike higher. Not only is the short story fascinating in silver, the "is-it-a-precious-metal-or-a-base-metal?" question is equally wonder-inspiring.

When the SLV was pressured from its peak, its price weakness was tied to gold, since it was trading as a precious metal. Now, silver is pressured because those pressing the base metals (due to the economy?) are selling silver, due to that selling programme.

Seriously? The bears win BOTH ways?

I appreciate the argument that has been made that silver's price has not yet benefited from its role as an industrial metal, as witnessed by the silver:gold ratio, which has been in a very long term uptrend. Simply, the ratio's major uptrend is a result of silver's greater affordability as gold rises in price. When silver's growing worth as an industrial metal will be valued, that will be yet another major catalyst to propel silver higher. However, this has not yet been the case.

The fact that silver could be punished from both sides (as both a precious and industrial metal) merely underscores the point that there is a great deal of potential for silver to spike higher, as markets go from one extreme attitude to the other. Moreover, silver will follow inflation, which need NOT be correlated to economic strength. We are entering an age of higher prices due to shortages, not economic strength.

The silver:gold ratio's uptrend WILL confirm exponential, as opposed to geometric, silver price increases when its value as an industrial metal will kick in. Having said that, it is utterly illogical to argue that silver has been pressured for the same reasons that have dragged down the base metals, namely, concern about the economy. Those who have sold silver as a proxy for their sell-the-base-metals-programme will therefore have their heads handed to them, as silver rips to the upside as a precious metal.

On the industrial metal argument, let us note that copper usage, for instance, is well known. So, to factor in an economic slowdown is as easy or hard as it is to estimate the slowdown in question. {As well, if copper is being pressured due to economic weakness (and dragging silver down for now), isn't that inconsistent with the idea that the stock market is rallying due to an improving economy, which in turn is bad for precious metals?}

However, the silver story is different, beside the value of it as an industrial metal not being factored-in anyway. Why? Silver's application in new technologies is precisely that, new: solar panels, auto instrumentation, cell phones, medical equipment, etc. Since the uses are new, technological advancement buttresses the effects of economic slowdown, without which silver consumption would otherwise increase geometrically (along with exponential price activity, if precious metals were in favour).

The 5-year chart of the silver:gold ratio below allows us to glean 2 key points. Firstly, when viewed thus, as opposed to the gold:silver ratio, it becomes plain that the picture is virtually a copy of the silver chart. This makes it easy to argue that silver's price tracks the ratio chart, thereby substantiating the case that silver simply outperforms gold, as the latter's appreciation makes it undesirable for most non-governmental investors due to cost.

Regarding the level of the ratio, we may observe that critical support levels were achieved and retested, which suggests the re-emergence of preciousness as a driver for silver's price. With tenuous global equity prices, this influence may become magnified.

As a tangential consideration to the economy and the attendant arguments regarding base metals, I remind that I had come to conclude at the end of the year that I unfortunately may have been a quarter early in forecasting a peak in equities, and that was certainly the case. The divergences in the major averages are building, both in terms of internal momentum indicators and versus other global indices.

For a long time, I had forecast that the day would come when equities and precious metals would go their own way and trade asymmetrically. Well, that day finally came to pass and, without being dependent on it, a falling stock market will itself fuel the silver rally. Money is parked in equities these days, and a TINY fraction of what exits stocks will find the far less available and heretofore only-priced-as-precious silver. If the amount is less tiny, "exponential" becomes the favoured adjective.

Reiterating, the silver bears will NOT have it both ways.


In these pages recently, I was prematurely bullish at $31 - $32. This was the case since I had viewed a major Wave-2 bottom (using Elliott terminology) as having already concluded, such that rallies from last year's low at $25.34 on the SLV were deemed to already be part of the massive Wave-3 advance toward the forecasted $60 level.

However, as I describe below, the correctly identified lows last summer only confirmed a greater error by producing big gains. In other words, the $9-rally to $34 confirmed an incorrect interpretation. In the past, when I was early in such fashion, I was fortunate enough to identify what would turn out to be a major long term turning point, such as what I believe is occurring now.

Immediately below, please observe the weekly 5-year SLV chart, which includes (1) the 200-week moving average, (2) major Elliott Wave-count since the 2011 peak, (3) the shoulder-head-shoulder annotation, (4) slow stochastic and, (5) descending wedge formation.

  1. The 200-week moving average is at $26.35.
  2. The requisite waves A, B and C are already completing or completed, according to this interpretation.
  3. The left shoulder on this long term chart completed Wave-A, while the right shoulder is completing Wave-C (the head was last summer).
  4. The slow stochastic is at ridiculously low levels that have corresponded to major lows in the past.
  5. The descending wedge formation illustrates the possibility for a violent breakout that would leave bears aghast, should an explosion toward $35 as quickly as this quarter indeed occur.

Click to enlarge

The following 6-month daily GLD chart reflects a massive bullish slow stochastic divergence (beneath price chart) in place; such divergence exists in the SLV (as well as the GDX, GDXJ).

Volume divergences exist in both ETFs, with the respective 200-day moving averages having flattened since late February.

Click to enlarge

The VXSLV (Silver Volatility Index chart) has bounced sharply from last week's all-time low.

This makes sense as speculators respond to the greater volatility seen during a flush-out, and further experienced as a reversal leaves a new range of volatility behind.

As equities trade asymmetrically to PMs, note that the Dow's and S&P's momentum indicators' divergences are worsening badly, while the divergence versus the Russell 2000 is reminiscent of 2007.

Strategic Approaches

One, if using the SLV, would be to contemplate a 200% long position at this time, using a close under $25.34 to liquidate half the position; another level could then be used to return to 200% long. Alternatively, if using options, one could take advantage of the fact that the VXSLV is days off of the all-time low, to take advantage of ultra-cheap 1 and 2-year (!) call options for what could become spectacular gains, of that sort that one ordinarily expects from short-dated and highly speculative trades.

Either of the above two strategies suggests very limited risk versus potentially substantial gains, but, most importantly, could, according to what may be appropriate in one's own particular case, serve a critical strategic financial purpose. Global risks are many. Solutions are comparatively few.


Silver will be hoisted to the top of the flag pole for any or all of the reasons above, to rationalize a short covering panic that will have been made possible by the most irrational of selling circumstances. ALL factors will feed on each other, the manic opposite of the depressed negative domino effect en vigeur today. Welcome to market psychology!

To not be outdone, Bernanke will respond to the BoJ's actions and, in that debt repudiation, or global wealth transference, or whatever one prefers to call it, the USD-PM charts will look like what they presently do in Yen... and then some, thanks to the market's recognition of inflation, and thanks to the Brits, Swiss, Koreans, Middle-Easterners, short coverers, under-invested public, Commercials (producers)....and, you.

Disclosure: I am long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.