Precious Metals Bottoming: Bitcoin Drivers Morph Into PM Demand

by: Sid Klein

There is never any shortage of long-term fundamental reasons to be bullish on the PMs, including the Bitcoin craze that will morph into PM demand. The fundamentals discussed following this Bitcoin section serve as the reasons why. As Bitcoins appeal mostly to non-institutional and non-major wealth investors, silver will be the principal beneficiary, I believe.

Bitcoin's global sentiment represents the increasing desire for an alternate store of wealth, as well as distrust of governments and banks. I am not concerned here with the viability of the Bitcoins, as much as the demand, what it represents, and how that will all be morphed into a demand for the PMs.

The Bank of China, Federal Reserve, BoJ, Russia, etc. will never transfer their abundant reserves into Bitcoins, obviously. The key is to note that there has manifested a non-institutional Bitcoin sentiment since the 4th-quarter of 2010 that emulates the chart of gold over the past 3 decades (illustrating psychological attitudes). Please see the following chart comparison of gold and Bitcoins which concludes in March.

The pursuant Bitcoin chart reflects the April blow-off from 70 (already a parabolic blow-off heading into the month) to 260, as well as its initial collapse Friday. (Is it suggestive of what to expect of either gold or, and more likely, silver en route to, say, $200 per ounce?)

Sentiment pertaining to Bitcoins is unstable, the opposite of what the public is seeking, as judged by its exaggerated movements (super-beta versus gold). Note the following Bitcoin chart since February through this past Friday.

The following picture includes volume, which was omitted above so as to not obscure the price action.

The price explosion arose from virtual (pun intended) nothingness in 2008 to $260, from where it crashed to $60 (both prices intraday Wednesday - Friday) on massive volume to end the week, corresponding to gold's collapse.

The public will figure out that the PMs are less volatile and can't be made to disappear for any of the reasons cited by Mr. Yardley's arguments (linked in 2nd paragraph). They may even take a liking to the fact that silver provides the limited supply that even gold doesn't, especially since the effect on it by industrial demand is much greater.

At the same time, possible imitation of the Bitcoin amounts to new mining supply, while silver suffers from a very different reality, as the following chart illustrates.

Meanwhile, the smart crowd is getting increasingly nervous about the long-term possibility of the government demanding that citizens hand over their gold, as was the case in 1933, however unlikely.

An example of the preceding may be the greatest ever collapse of gold stocks held at the Comex warehouses in a single quarter ($3B worth), which has gained attention, leading me to note the similarity of the charts of gold and the Comex stocks of it. The following April 8 chart is taken from the article linked here.

The chart of the Comex Gold Stockpile looks very much like the gold picture, which has now come to resemble it (the latter appears at the end of this article). What (literally) are the bears shorting? What would they ever be delivering?

There is a ton of room for demand to restock the supply to meet obligations to futures holders who will, I believe, increasingly take the course toward more physical forms of ownership.

Indeed, it is due to those very obligations and intentions that have caused MAJOR wealth buyers to say "Gimme my property," just as Texas and sundry sovereign states want to be able to do or have done, respectively.

That Texas could demand repatriation of its gold illustrates that it is not just sovereign states that have realized the virtue in healthy mistrust. (Texans balances their budget, it is worth noting, so they understandably believe in themselves before others.)

Cyprus was proof of what can happen, expropriation-wise, and 1933 evidenced what politicians are capable of once they get it in their minds that deflation is the greatest evil, which would suggest the need to have gold trade at dramatically higher levels (and the politicians' policies have indeed proved what their greatest fears are).

Please contemplate the US government's VOLITION to reverse course and now actually want to manipulate gold prices HIGHER! After all, there is enough gold to go around if the price is high enough and thereby combat inflation, as the here-linked discussion contemplates.

In the middle of all of this is the seemingly less striking story of a Japanese woman buying gold after having previously sold some, as the Yen's recent disaster has shown citizens there that the value of their savings is not safe.

Several months ago, I reported that the advent of gold purchases by Japanese pensions could singlehandedly cause a price eruption. The response by disbelievers was that their stated allocations were too small to make a difference.

I have rarely trusted the Japanese to tell anyone of their true intentions. The asset allocation advisors to the pension managers will not represent what goes on behind closed doors because that is just not how Team Japan typically works. Right up to and including the recent summit in the Japanese Yen, I have discussed this for 25 years.

The Japanese already knew they were going to crash the Yen when they announced that the pensions would finally join the Chinese and so many other central banks in buying the true reserve currency.

They were hardly serious, I believe, when they stated that only an infinitesimally tiny percentage of their vast pension holdings would be their ultimate allocation. (Still, the announcement served as a "wink" to its own populace.)

Do they really oversee $3.36 trillion in pension assets? I state here and now that the Japanese will have been at the center of gold's move thousands of dollars higher in the future to come.

There is more being made on sundry sites of the increased probability of a major silver short squeeze (please see bar chart of commodity short interest, linked at the conclusion of this article).

Yes, I conclude here as I did over this past week: silver can erupt in a short covering chase-scene for any and all of the reasons cited in my SLV articles. Future responses to bullish silver pieces might not be about not jumping the gun anymore. They could become about the short-coverers feeling the need to dodge the one pointed at their heads.

Please note the reprint of last week's 5-year SLV chart below {like the GLD, GDX and GDXJ, there is a confirmed bullish slow stochastic divergence at this point in time in the daily charts which are not shown this week}. Bullish slow stochastic divergences exist in both the GLD weekly and daily charts. The 3-year weekly GLD follows the SLV chart below.

In last week's article, I wished to draw attention to the SLV's meeting with its 200-week moving average. Now, for the first time since the 4th-quarter of 2008, the GLD is only $4.40 away from its own 200-week MA ($44 in gold). We could be there this week.

For those who are alert, one can snap it up there, but option buyers beware. By simply waiting, say, a week, prices will finally fall as the VXSLV and GVZ partially retreat from the explosive volatility levels attained by each.

The contemplated 200% long position in last week's article, which discussed a MAJOR turning point in silver, may be a repeat of the 2007 homerun hit, despite this past week's conclusion (the second approach that was contemplated therein was the use of a package of long-term calls, for potentially spectacular outcomes that are ordinarily associated with shorter-dated options).

Half of the 200% position was stopped with a minor loss, while the long-term options moved very little. If one waited to buy the shorter of the two long-dated calls, one could act as per the commentary in the paragraph above the preceding chart.

I believe that a good place to consider re-establishing a 200% long position would be at, say $24, or when the volatility calms over the coming week (too many are discussing $22.50).

In terms of prices, the key points are that we are making MAJOR PM lows, and that silver is dramatically outperforming gold; the GLD was down 4.97% on Friday, while the SLV declined 5.99%.

However, remember, the latter's beta versus gold is about 2, so the relationship of 1.2 on Friday was great. We can say that gold is "catching-down" to silver, after a multi-year outperformance, as both PMs are lining up now in preparation for the next major wave of advance.

In any event, I wish to reconfirm my bullish SLV view. A flush-out is how healthy bull moves begin, as opposed to short covering spikes, such as how past week began in the SLV.

Retailers need neither Bitcoins, nor gold. They need silver. Noting how the public manifested an exponential appreciation in Bitcoins, they could even be the ones to help squeeze the hedge funds' shorts to trigger the SLV's own parabolic pattern with the latter's break above $30.

Now, wouldn't that be some tail-wagging-the-dog-icing-on-top-poetry?!

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