Expecting Silver to Lead Gold on Both the Upside and the Downside

I think there has been a turn in the USD. As it gets stronger, commodity prices are likely to get weaker. In fact, Wednesday’s bullishness in the US oil futures market was somewhat over-the-top, growing +3.50/bbl on the basis of a lower reported weekly estimate of inventory.

Looking at the Point & Figure charts for gold (900.20) and silver (17.18) Thursday morning, I noted that the indicated cycle low is $770 for gold and $14.00 for silver, which, if reached, would require a much higher $USD. That seems true as the P&F chart for the $USD (72.22) indicates a rally to a cycle high of 76.00.

Moreover, looking back over the highs and lows of the Weekly price series data, the average pull-back for gold is -25.5%, which just happens to be the difference between the recent record high of $1033.90 and the projected cycle low of $770.

At a current $900.20, the price is only off -12.9% from the high.

For silver, the current price of $17.18 is down -19.87% off the recent cycle high of $21.44, and the P&F-projected cycle low of $14.00 would be a drop of -34.7% from the peak. But the average drop from high to low of the past six cycles has been -22.5%, which might indicate a projected low for silver of $16.60.

This is where the tea-leaf reading gets tricky. Looking at the chart for silver, I believe a cycle low case could be made for both the $14.00 and $16.60 price level. But, I know the Silver Crazies (my word for these traders who are more fanatical than the average gold bug), and I’m going to acknowledge that the past six cycles were in expansionary phase, but now the economies of North America, Europe and Japan are definitely slowing (and probably recessive right now given that the data is always slow to come). Moreover, the International Monetary Fund this week says there is a fair risk of a global recession now, which was unthinkable two or three months ago. I think as the IMF commences its gold sales this month, that move will scare the Silver Crazies into selling enough of their holdings to push the price to as low as ~$14.00 this year, probably in the next six months. That would represent a difference of -34.7% from the recent cycle high of $21.44.

Besides, silver has more of an industrial metal component in its pricing than does gold, and the slowing economy should pull down silver faster than gold, which will be more supported by the weak $USD, even if that $USD is to follow through with a Bear market rally over the next six months.

The point of all this is that you need to look at the various inter-related charts and see the consistencies and the aberrations. You try to think through any anomalous price. To me, in a serious downturn for precious metals, I expect silver to lead gold on the downside, just as I expect it to lead on the upside, as it has done.

Since these prices don’t trade in a vacuum, you also have to look at the various goldminer price charts, both for the individual stocks like Barrick (ABX) and Goldcorp (GG), and the indexes, like say $XAU.

$XAU is interesting in that the current price of 180.30 is down -13.84% from the (record) cycle high of 209.27. That’s a little worse than the drop of -12.9% for gold and somewhat better than the -19.9% drop for silver, which is reasonable. But I noted that there could be two projected price cycle lows: 128.0 as shown on the P&F chart, which would be a drop of -38.8% from the high; and 159.0 if I use the average drop from high to low of -24.0% for the past six market cycles.

Looking at the chart, I think a case could be made for both the 128.0 and the 159.0. In both cases, however, there is still a considerable fall to come from the current price of 180.30.

Now that we’ve looked at the precious metal bullion prices and the goldminer stock index prices in relation to the $USD, we must also consider the price projections for Crude Oil ($WTIC 104.83) because if crude oil is going higher, then it would be difficult to project these lower gold-related prices.

Well, it’s never easy because, using Point & Figure analysis, the price projection for $WTIC is 127.00. Wow!! What else can anybody say but wow!

How many of us believe that a $127 price is likely given the economic conditions the US sits in today? Where would that take the price of gasoline? Let’s look at unleaded gasoline contracts ($GASO 2.76, with an intra-day high Wednesday of 2.77, which is a new record). The P&F chart is bullish, yet undefined as to price objective. However the 50-day MA is 2.59, and if you draw a trendline from the Jan-07 low of $1.37, I think you can see how close to a violation the 50-day MA is and that a pullback from 2.76 to below 2.59 would be a break in that trend. To me that would send the price of $WTIC lower, and reverse the P&F indication from 127.00 to something like 80.

You see, I don’t think the American consumer has got the disposable income to pay higher prices at the fuel pump (beyond a brief spike maybe) without there being irreparable harm to retail sales of discretionary and even staple items, and to the (suburban-centered) housing market. I think America is at the point of a crisis here, and that bankers need to pull down the price of oil and gold in order to support the economy and save their own banking system.

So, I’m not accepting of a $127/bbl bullish P&F price projection for crude oil. I think the $USD is reversing because bankers need it to rally, even to 76, and that will pull down the crude oil price. OPEC leaders will be placated with oil at 80 if the $USD is at 76. If, by chance, the $USD could rally back to 80, then I think OPEC would even be satisfied with 75 oil. It’s not in the interests of OPEC to see oil over $100, and the US economy falling apart at the seams. They would know that there would be huge incentives then to bring in alternatives to oil, which are happening anyway but would flood in if oil were ever to reach the price of $127/bbl.

Anyway, I have to bring this discussion to a conclusion. I do believe the US economy will continue to weaken, and that precious metal and oil prices will come off. However, the closer the market takes the price of gold to 770 and silver to 14, the more interested I am in moving from cash to precious metal bullion and goldminer stocks.

I have been working on a paper called Managing Cash as an Asset in which I will be recommending a new service I am facilitating, or will be when my paper is published, hopefully early next week. When I am not satisfied with the risk:reward possibilities for capital markets or real estate markets, I turn to cash and bullion markets as the best alternative. In that case, if bullion is falling in price, I am moving into cash, and vice versa. As I believe that bullion is now in a declining phase, within the context of a long-term bull market for gold, I am building ammunition for the day I pull the trigger.

In the meantime, cash is cash. Maybe it’s USD, maybe Euro, maybe Yen. That is a market best left to expert traders who deal in the daily $3 trillion turnover forex market. That is the service through a company I now advise that I will be recommending to people starting next week.

To wrap up, I always say that the more you know about something, the more interesting the nuances become.

Comments

[Lisa]

Sorry for my ignorance, but what are Point & Figure charts?

[jens ^j^]

Your article is very compelleing and believable. If paper Silver does go down to the levels indicated real silver, if available, will be a bargain. The recession/depression will curb mining activity in most mineral classes, silver is for the most part, a by-product of those other mining activiies. Because it is consumed at a higher rate vs production than the other metals Silver will continue to be in short supply. As evidence we only need concider the billions of ounces which were once National Reserves and have been industrially consumed; reserves which are virtually gone today.
Do the ETF's trading in Silver have all that they should in storage or are the regulations such that they also buy paper which can never be completely converted to Bullion. If it is required that a 500,000 ounce order is required to "cash in" and recieve real Silver from an ETF it sounds more like a good way to collect Silver for the big boys but the little guy loses out; again.
The fact that the US dollar is rallying bodes ill for the poorest on the planet, especialy if they do not trade with the US. They must find US dollars to pay for trade, especially in oil. This is the key to Saddam's WMD, trading his oil for Euros was a Weapon of Monetary Destruction. Iran is also flirting with a WMD by trading oil in Euros.
As for the value of the US dollar; is this not the end of the first quarter, a time for settlement, and the US dollar is given additional value for all the large holders and their treasuries, if somewhere someone is forced to overpay, thus overvaluing those dollars held by others.

[whidbey]

Your opening premise regarding the dollar is questionable. Congress has yet to finish its fix for housing, and god knows what else. And just how do "bankers pull down the prices of oil"? You assume some rather delusional things to reach your conclusions. $127 oil is not practical, it is and it is imposed by world markets not bankers. As for currencies, the rate at which you think-slowly-will get you killed in currencies. Where do they get you zombies?

[sujo]

$127 oil may be high in US dollars but is getting cheaper in other currencies.

[Henry L]

Interesting how chartists tend to rely on trend pairs as a basis for forcasting. I've subscribed to several of the well-known gurus who are willing to sell their opinions, but never made as much using their tips as I can using my own resources. There is just so much randomness in the markets that is unknowable, and it surely doesn't show up in the charts.

[mongoose]

Lisa, A point & figure chart is displayed in an ( X & O ) format usually with a three box move to change from X or up or O to down without a time frame or volume.

[mongoose]

Google it.

[leh]

Agree with whidbe that this so called dollar rally is a rather feeble dead cat bounce. The fundamentals for the USD couldn't be worse, period. Which means gold and silver will resume their uptrend shortly. If you look at the charts of some of the stronger miners like KGC, this latest pullback is relatively mild, IOW bullish action, and I'm guessing a new floor is being put in here from which to launch news further gains in the months ahead. All I see here is routine consolidation.

[bhakta]

I see the FED and TREASURY are trying to support the USD. But, unless the surreal deficit spending and trade are brought to balance, there is no way the USD can become strong. I see no sense in the Congress or in the Executive branch to deal with the real problems. Second, all these insane loans given out, were done of pure greed and those responsible should be jailed for life.

[Richardq]

if there is even a whisper of economic problems in the EU then the Euro will take a long deserved dive back below 1.50.

so at this moment, its not a question of the USD strengthening, its a question of the Euro weakening....

if the Euro weakens then of course oil, gold, silver and all the rest will drop like a stone,

so you see that the USD can in fact have quite a nice bounce, without actually improving fundamentals at all, simply because the opposition Euro zone... is weakening....

case in point take a look at a chart of the British Pound... its backed off from 2.10 to around 1.98, as weakness in the UK becomes a worry.....

put a similar chart onto the Euro and that will drag gold and oil and the rest with it.... not because the US has improved at all, but simply because the EU zone is failing and so the USD starts to look stronger... or like not such a bad bet.....

[Richardq]

and..... add some more economic worry into the EU... and drive the euro back to 1 to 1 on the USD..... no one will touch the Euro ever again having instantly lost 30% of their hard cash.... people forget the 1980s and 1990s when Italy, Spain and others were in a constant mess with their currencies... the only thing that has changed in those countries is huge inflation since the Euro came in.... The EU and the Euro is by no means the safe haven it appears to be.....

The USD can infact have a huge rally, simply off the back of the EU economic slide....

and the US is way ahead of the EU in curing its troubles... and my god... help the EU if there are problems, all those leaders will be bickering and the whole thing will become a huge mess... .

you may not like Bernake and the Fed and GW and the wonky US Election system... but at least its predictable in its mess....

The EU and Euro is a disaster waiting to happen....

[Richardq]

with that said... there's nothing to stop a blow off top on the euro to 1.60+ and a blow off on oil upto $120+... in these crazy markets it can all happen in the space of a week

[Matt Brakey]

Silver "crazy" here. There are some serious supply and demand issues that underly silver that will ultimately transcend any short term economic cycle. If silver goes to $14 (which I think it might) it will bounce off of it like a super-ball. Look to see what has happened to silver every time it's touched its 200 day moving average after a sharp sell off.

[LittleTurtle]

Lisa, see //stockcharts.com for P&F charts.
They are within the best websitesites for technical analysis.
I agree, silver could retrace down to $15, but then retry a higher high.
Many studies are showing that in defationary or inflationary busts, prcious metals are performing badly. Is this time going to be different ?
...