Gold Market Meets September 28, 2017, Short-Term Targets
Upon completion of the 180-day cycle that began on September 28, 2017, which we published in Seeking Alpha regarding the gold market long-term outlook, it appears that all the short-term targets in the gold market have been met. We have corrected back down to test major support levels in the $1309 to $1317 area before the resumption of the uptrend occurs to complete the long-term targets of 1386 to 1484 . We highly recommend adding to your long positions if gold tests these levels again.
Gold/Silver Ratio Signaling a Silver Rally
The gold/silver ratio has given an unusual signal that the price of silver could be setting the stage for an explosive move to the upside. The silver market is a really interesting product to trade. It has multiple personalities, since it can be used for industrial, scientific and technological purposes, as well as having a long history of serving as a currency or monetary unit. It has long been called the poor-man’s gold.
November 2008 All Over Again? 400% Silver Increase
The current gold/silver ratio is 80 to 81, which is at or near historic highs and is very similar to November 2008, when it traded at 80.48. The price of silver then was trading at $9.70, just before the Great Recession of 2008. The price of silver then exploded to the upside and went to $49.82 as of April 2011 as the gold/silver ratio collapsed to 31.53. Silver moved from $9.70 to $49.82; more than a 400% move in less than three years.
When I look at silver trading at $16.55 currently, I begin to see that silver is offering an incredible historic opportunity. When we see the fundamentals in the silver market, there is an increase in the use of silver in solar panels, especially in newer panels. As we move into a crypto-currencies environment, the general consensus has totally forgotten silver, which has the qualities of a currency. Crypto-currencies are in the early stages of development in establishing themselves as assets. This does not mean that such new assets have eliminated all other assets which have proven themselves historically to provide not only the ability to produce positive returns but to serve as risk assets as we enter any economic or political crises. Do not forget gold and silver.
The policies of the current Trump administration are not positive for the economy. Wage growth, inflation, the decline of the US dollar as the world’s reserve currency, and an economy that relies on a hoped for renaissance of the US economy, is an economy based on shaky foundations. When you take into account current US economic policies, such as our level of debt, an inverted yield curve, which means that short-term interest rates could rise faster than long-term rates, the current administration’s policies combined with the current environment could prove devastating for the bond markets, especially when interest rates rise. With the current monetary policy momentum to raise interest rates, it creates an alarm that some areas in the economy could begin to be affected negatively at a fundamental level. The question is where and when will we begin to see these unintended consequences of the current policies discounted in the price of silver ?
Gold/Silver Ratio: Fundamentals
The gold/silver ratio indicates that you can buy 80 ounces of silver for the price of one ounce of gold, when the average mining gold/silver ratio is about 1 to 9. Based on the track record of the ratio, we have seen the price of silver explode exponentially when the ratio has been at such a position before, adjusting its price to its mean, while taking into account any economic or political crisis that might jeopardize the world economy. The question is; if we are currently running the gold/silver ratio at the same level as in 2008 when silver was at $9.70, are we looking at a 400% move in silver over the next three years?
This indicates that as we went into the 2008 Great Recession, the price of gold and silver came into focus as risk assets, and the price of silver went to a record high in 2011 of $49.82. If this occurs, the target price for silver over the next three years is over $65 per ounce.
Silver Weekly S&D levels
Let’s take a look at the current environment for silver in terms of the supply and demand levels that we use to identify trading opportunities for the coming week. If we look at the current report that was produced by the Variable Changing Price Momentum Indicator (VC PMI) as of March 9, 2018, it indicates that the silver market closed at $16.46. The first VC PMI filter, which is the weekly trend momentum, using the 9-day moving average, was $16.94. With the market closing below $16.94, the VC PMI is telling us that the trend momentum is slightly bearish. It also tells us that if the price reverts back above $16.94, it would negate this short-term bearish trend to neutral. If you want to trade the short side of the market, $16.94 would be a reversal pivot point that would neutralize this bearishness coming into this week.
The second filter that we use is the weekly price momentum indicator, the mean or average price, coming into next week. The VC PMI identifies the average price and then extrapolates the extremes above and below the mean. When the price closes below the weekly price momentum, as in this case of $16.81, we have a bearish price momentum as we come into next week. If it closes below the average price, it activates the levels of demand below. In this case, it is telling us that if the market comes down to $16.33 to $16.04, which are the buy 1 and buy 2 levels, you should cover any short positions, and reverse and buy long. This activates the level of demand for the extreme below the mean with a high probability that if the price reaches the buy 1 and buy 2 levels, we are looking at a 90% to 95% probability that the reversion will occur next week and bring the market back above $16.81. A second close above $16.81 would activate the extreme above the mean of $16.90 to $17.18. The VC PMI is able to give self-directed traders a structure that you can use the reversion to the mean with a high degree of success based on highly probable events.
With the gold/silver ratio trading at historic levels above 80, and when we look at the relationship to the 2008 high, I find a very similar situation that indicates that the price of silver is ready to revert back to its mean. If we look at the long term targets, we are looking at $65 target levels for silver over the next three years. Over the short term, coming into next week, if we can close the market above $16.90, it would set the stage for the continuation pattern that began on September 28, 2017, the 360-day cycle bottom for the gold and silver markets, which we published on Seeking Alpha.
Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed herein constitutes a solicitation of the purchase or sale of any futures or options contracts. It is for educational purposes only.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.